By Matt Robinson and Aleksandar Vasovic
BELGRADE (Reuters) - Serbian President-elect Tomislav Nikolic, last in power when NATO bombed Serbia in 1999, faced the challenge on Monday of proving he has swung behind the country's pro-Western course, after a shock victory that rattled the region.
The election of Nikolic, a former ultranationalist ally of late strongman Slobodan Milosevic who says he now supports Serbia's goal of joining the European Union, plunged the country into political uncertainty.
A dour former cemetery manager known by the nickname "Gravedigger", Nikolic beat liberal Boris Tadic in a close-run vote in which less than half the electorate turned out, breaking the almost 12-year hold on power of the reformists who ousted Milosevic in 2000.
The result throws into doubt a deal on a ruling coalition headed by Tadic's Democratic Party and will cause unease among Serbia's neighbours, for whom rightist Nikolic is closely associated with the bloody collapse of Yugoslavia.
The EU, weighing up his professed conversion to the goal of accession, congratulated Nikolic on his victory and urged him to support the next Serbian government in pursuing talks on joining the bloc that could start next year.
"Serbia's European perspective is very concrete and we therefore hope to be able to rely on President Nikolic's personal dedication to achieve this aim," European Commission President Jose Manuel Barroso and Council President Herman Van Rompuy said in a joint statement.
Calling for "statesmanship", they stressed the need to continue the process of reconciliation in the region after a decade of war in which more than 125,000 people died, and to improve relations with Kosovo, a former province of Serbia that is now an independent state.
In Serbia, the prime minister is more powerful than the president, but the head of state can hold up legislation.
Nikolic, 60, was in government with Milosevic in 1999 when Serbian forces expelled almost 1 million ethnic Albanians from Kosovo and NATO intervened with air strikes.
Tracking the Balkan country's gradual progress from pariah state to EU membership candidate in March, he has tried to reinvent himself as a pro-European conservative since splitting in 2008 from his firebrand mentor Vojislav Seselj, now on trial for war crimes in The Hague.
IMAGE OF ELITISM HURT TADIC
Nikolic once said Serbia should become a province of Russia, but now advocates economic ties with both East and West. The EU, source of the vast majority of trade and investment in Serbia, will take encouragement from his first remarks on winning: "Serbia will not stray from its European path," he said.
Contrary to dire warnings from some observers, the vote was "not a referendum for or against the EU", Nikolic said, adding that he would seek talks with German Chancellor Angela Merkel as Serbia's "main ally in the EU".
Timothy Ash, global head of emerging-market research at the Royal Bank of Scotland, said "Nikolic will, I think, be eager to prove - both to the electorate and the international community - that he and (his party) are now ready to govern, in a moderate manner, looking towards the next parliamentary election."
It was third time lucky for Nikolic, who had twice lost to Tadic but won on Sunday with 49.5 percent versus 47.4 percent. Analysts said he benefited from the low turnout of 46 percent.
Tadic failed to win over undecided Serbs fed up with what many saw as a culture of elitism and complacency that had crept in under the reformers in power since 2000.
Nikolic's man-of-the-people manner appealed to Serbs tired of the grinding transition from socialism to capitalism and an economic slowdown that has driven unemployment to 24 percent.
Serbia's neighbours greeted his victory with caution.
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."
Sulejman Tihic, the leader of Bosnia's biggest Muslim party, the SDA, told Reuters: "We respect the will of the Serbian people ... and I do not expect a major shift in relations between our two countries."
Kosovo President Atifete Jahjaga called on Nikolic "to do what his predecessors did not; to find the courage and take the steps to establish good and peaceful relations with Kosovo".
DINAR WEAKENS, CDS SURGE
The Serbian dinar weakened against the euro on Monday on the post-election uncertainty. By early afternoon the dinar had dropped 0.9 percent to near an all-time low of around 114, dealers and traders said.
"The dinar is now likely to suffer additional losses due both to the domestic situation and the euro area crisis," SEB analysts said in a research note. Serbian credit default swaps surged 22 basis points from the previous session's close on doubts over the next government.
Data from Markit showed that the cost of insuring exposure to Serbia rose to 430 bps from Friday's close of 408 bps. This is the highest level since May 10, as CDS have edged higher since Nikolic's Progressive Party won a May 6 parliamentary election.
As president, Nikolic is expected to hand the mandate to form a new government to the Progressives, which could upset a tentative ruling alliance agreed between Tadic's Democrats and the Socialists led by Milosevic's wartime spokesman Ivica Dacic.
Dacic said on Sunday the deal would stand whatever the result of the run-off. But negotiations have yet to begin in earnest, and he was quoted in the Serbian daily Blic as saying: "Of course, everything's now going to be more complicated."
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.
"The big questions about 'whither Serbia' will be answered as the parties settle who will be in the governing coalition," said Marko Prelec of the International Crisis Group think-tank.
"I don't see any reason to doubt President Nikolic's commitment to EU membership and regional peace and stability."
(Additional reporting by Fatos Bytyci in Pristina, Daria Sito-Sucic in Sarajevo and Zoran Radosavljevic in Zagreb; Writing by Matt Robinson; Editing by Andrew Roche)
