By Aleksandar Vasovic
BELGRADE (Reuters) - The election of rightist Tomislav Nikolic as president has plunged Serbia into a period of deep political uncertainty and unnerved a region that associates him with the bloody collapse of Yugoslavia.
Nikolic beat liberal Boris Tadic in a close-run vote in which less than half the electorate turned out, breaking an almost 12-year hold on power by the reformists who ousted Serb strongman Slobodan Milosevic in 2000.
A former ultranationalist ally of Milosevic who says he now supports Serbia's goal of joining the European Union, Nikolic's victory throws into doubt a deal on a ruling coalition headed by Tadic's Democratic Party.
It will also cause unease among Serbia's ex-Yugoslav neighbours for whom Nikolic remains Milosevic's ideological heir and an unapologetic nationalist. He was in government in 1999 when Serb forces expelled almost 1 million ethnic Albanians from Kosovo and NATO intervened with air strikes.
The European Union will take encouragement from his first remarks on winning: "Serbia will not stray from its European path."
Contrary to dire warnings from some observers, the vote was "not a referendum for or against the EU," he said, adding he would seek talks with German Chancellor Angela Merkel as Serbia's "main ally in the EU."
On Twitter, Swedish Foreign Minister Carl Bildt wrote: "Serbia under Nikolic must create confidence in its will to move towards Europe and partnership in the region."
Tracing the Balkan country's gradual progress from pariah state under Milosevic to EU membership candidate in March, Nikolic has tried to reinvent himself as a modern, pro-European conservative since splitting in 2008 from his firebrand mentor Vojislav Seselj, now on trial for war crimes in The Hague.
The jury is still out. Diplomats say the West is encouraged by his apparent conversion to the ultimate aim of taking Serbia into the EU, but they admit uncertainty over the substance of his policy or whether he can continue Tadic's work in fostering reconciliation in the region.
"Political earthquake in Serbia," read the frontpage headline on the Croatian daily Jutarnji List.
Croatian Prime Minister Zoran Milanovic told state radio: "The Serbian people have chosen and we respect their will. In the European political spectrum, this is a political option that is less close to ours, but that is no reason not to cooperate."
"HORSETRADING"
The Serbian dinar fluctuated sharply against the euro on Monday as investors weighed the impact of the result. By midday the dinar traded between 114.32 and 112.95, dealers and traders said.
"Overall sentiments are negative, but it appears that most investors are waiting to see whether Nikolic will make good on his promise of cooperating with the European Union," said a dealer with a Belgrade-based commercial bank.
Beaten 50.2 percent to 46.8 percent, Tadic was punished for an economic slowdown that has pushed unemployment to 24 percent and for what many Serbs regard as a creeping culture of elitism.
His party was also beaten into second place by Nikolic's Serbian Progressive Party in a May 6 parliamentary election, but the Democrats were poised to retain power in a repeat governing coalition with the third-placed Socialist Party led by Milosevic's wartime spokesman Ivica Dacic.
Under the constitution, the prime minister is more powerful than the president, but the head of state can hold up legislation.
Dacic said on Sunday the deal would stand whatever the result of the run-off, but negotiations have yet to begin in earnest. "Of course, everything's now going to be more complicated," the Serbian daily Blic quoted him as saying.
As president, Nikolic has the right to give the mandate to form a government to the largest party - his own.
Even if the Democrats do form the government, an awkward "cohabitation" with Nikolic as president could slow reforms necessary to revive the flagging economy, rein in the public debt and clinch talks on joining the EU.
"Now the horsetrading will begin, and it's unlikely that the new government will be created before July or August," Vladimir Todoric of the New Policy Centre think tank told Reuters.
Vladimir Gligorov of the Vienna-based Institute for International Economic Studies said: "No coalition or party has received a clear mandate to lead the country. The Democrats and Socialists will be able to form the government, but such a government might not last long."
With the EU weighing whether to open accession talks next year, the government will face pressure to reform the judiciary, get serious about rooting out the crime and corruption that flourished under Milosevic and cooperate on Kosovo.
The majority-ethnic Albanian territory declared independence in 2008 but Belgrade still controls a small slice of the north where Serbs live, in a de facto ethnic partition that the West said it would never allow.
Like Tadic and most major parties, Nikolic says he will never recognise Kosovo as sovereign, but the EU expects Belgrade to loosen its grip on the north and improve ties with Pristina.
"We are concerned that Nikolic never renounced his role in organising and inspiring forces engaged in war crimes in Bosnia, Croatia and Kosovo," Kosovo Deputy Foreign Minister Petrit Selimi told Reuters.
"We expect Serbia to behave as an EU candidate and start normalising relations with all neighbours, including Kosovo."
(Additional reporting by Matt Robinson in Belgrade, Fatos Bytyci in Pristina, Daria Sito-Sucic in Sarajevo; Writing by Matt Robinson; Editing by Janet Lawrence)
