* Centre-right wins 118 out of 200 seats
* Surprising right win positive for markets
* Centrist Public Affairs party may be difficult partner
(Updates with comment on talks)
By Jan Lopatka and Jan Korselt
PRAGUE, May 30 (Reuters) - Czech centre-right parties began
talks on forming an austerity-minded coalition government on
Sunday after their surprisingly decisive election victory over
leftists who advocated higher welfare spending.
Three centre-right parties, led by the Civic Democrats under
new leader Petr Necas, won 118 seats in the 200-seat lower house
in Saturday's parliamentary vote, defying expectations for a
tight result.
The right has promised to push through fiscal austerity
measures to avert the risk of a Greek-style debt crisis.
The European Union member's debt, which totals 35 percent of
gross domestic product (GDP), is only half the EU average and
less than a third that of Greece.
But economists say the debt burden will rise quickly unless
the new government implements budget reforms, including an
overhaul of the pension system.
Civic Democrat leader Petr Necas has met the heads of both
potential coalition partners -- the conservative TOP09 late on
Saturday and centrist Public Affairs on Sunday morning -- to
discuss forming a coalition.
"These discussions, which for the moment are informal,
confirmed the common will of our parties to work on this
project," Necas said in a debate on Czech television. "We are on
a good path."
He said he supported belt-tightening that goes beyond plans
by the current caretaker government to cut the budget gap to 4.8
percent of GDP in 2011, down from a goal of 5.3 percent for this
year.
The party plans to reduce spending in ministries and cut
social benefits, crack down on welfare abuse, and push people
off dole lists if they refuse retraining or potential work.
"It is our duty to be more ambitious. That means making a
bigger cut to the deficit to somewhere around the level of 4 or
4.5 percent," he said.
Analysts said negotiating with the inexperienced Public
Affairs party could be difficult but was not an insurmountable
challenge. If the parties agree on a deal, they will have the
biggest majority any Czech government has had since the country
was created in 1993.
AUSTERITY MAY SLOW RECOVERY
A centre-right coalition would be the outcome most welcome
to financial markets because investors believe it would be the
government best equipped to launch needed reforms.
It could also boost the crown currency, which fell 0.8
percent against the euro on Friday on fears a hung parliament
could lead to protracted government talks.
"These elections suggest decisive action on the budget and
pension reform," said Timothy Ash, an analyst with Royal Bank of
Scotland. "They should significantly ease market concern over
any vulnerabilities."
But he said fiscal austerity might hurt a fragile recovery
in the Czech economy, which shrank 4.1 percent last year and is
expected to grow by around 1.5 percent this year.
The election was a big defeat for the leftist Social
Democrats, who had expected to win by a large margin and to be
the decisive force in building any coalition.
The Social Democrats won 22.1 percent of the vote, more than
any other party. But the Civic Democrats trailed them by less
than two percentage points, and the popular new TOP09 and Public
Affairs helped them steal victory from the left.
Social Democrat leader Jiri Paroubek quit on Sunday,
acknowledging his party had little chance of finding partners to
form a government. First deputy Chairman Bohuslav Sobotka said
that as the strongest party, the Social Democrats had earned the
right to try to form a government but he was not optimistic.
"We are looking at the situation realistically. We see there
is the possibility of cooperation among parties from the right,"
he told Czech television.
The left failed to convince Czechs of the credibility of its
generous pledges to raise welfare payments while at the same
time cutting the budget deficit.
"When you look at how quickly the debt is rising, it is a
tragedy," Martin Balcar, a 43-year-old warehouse keeper. "I like
the result. I voted for a party that can lower our debt."
(Additional reporting by Jana Mlcochova and Robert Mueller;
writing by Jan Lopatka and Michael Winfrey; editing by Noah
Barkin)
