Malaysian Front regrouping after poll shock

KUALA LUMPUR (Reuters) - Malaysia's ruling coalition triedto regroup on Monday after a shocking electoral setback thatdecimated its ranks and sent markets plunging over thepolitical uncertainties ahead.

Prime Minister Abdullah Ahmad Badawi was sworn into officeafter his Barisan Nasional (National Front) coalition lost thetwo-thirds majority in parliament it had held for nearly fourdecades at the weekend's elections.

After getting a welcome vote of support from his UnitedMalays National Organisation (UMNO) to stay on as both partypresident and prime minister, Abdullah sought to allay investorconcerns about policy change. "We will ensure these policieswill contribute to growth and confidence in our economy."

But the prime minister has an enormous task ahead inholding together his battered coalition and filling holes inhis Cabinet -- four ministers lost seats in the weekendelection, including Works Minister S. Samy Vellu, the head ofthe main Indian party in the coalition.

A key partner in the multi-racial coalition, the MalaysianChinese Association (MCA), dismissed speculation the partymight pull out of the coalition that has ruled Malaysiauninterrupted since independence from Britain in 1957, and theMalaysian Indian Congress (MIC) followed suit after the UMNOmeeting.

The poll carnage was spectacular and wreaked havoc on themarkets. Trading in Malaysian stocks was suspended for an hour-- the first time that's ever happened -- after they fell tothe daily 10 percent limit.

But credit rating agencies Fitch and Moody's on Mondaymaintained their sovereign ratings on Malaysia, saying theeconomy was on a sound footing.

"The element of uncertainty has gone up but thefundamentals of the economy are quite strong to withstand asharper-than-expected heightening of uncertainty," Moody'ssenior analyst Aninda Mitra told Reuters.

REVIEWING MEGA-PROJECTS

Race riots erupted the last time the ruling coalition lostits two-thirds majority in 1969, but the streets have been calmsince Saturday's vote, perhaps because members of all threeethnicities voted against the status quo.

Opposition parties took control of five of Malaysia's 13state assemblies in Saturday's elections, giving them a rangeof powers over issues such as land and water, both crucial tothe successful implementation of billions of dollars inprojects.

The Democratic Action Party (DAP), which now controls thecountry's industrial heartland of Penang, and Islamistopposition party PAS, which will take part in government inthree northern states, said they would review federal projectsin their areas.

The first indication of that came on Monday when theincoming government in Penang said it would review plans for an$8-billion (3.96 billion pounds) real estate project, whosemajor backer is a firm partly owned by businessman Patrick Lim,a friend of the prime minister's son.

Government-linked infrastructure companies took a beatingon the bourse. Malaysian Resources Corp tumbled a whopping 39percent, UEM World 24 percent, and Sime Darby 17 percent, overfears the opposition would scrap projects on the drawing board.

Opposition parties were trying to parcel out cabinet postsand power sharing arrangements in the first test of how wellthey will govern before being sworn into office on Tuesday.

Former Prime Minister Mahathir Mohamad, who anointedAbdullah his successor but now has waning influence in theparty, advised him on Sunday to take responsibility and quitand let deputy premier Najib Razak take over.

But Najib said after the UMNO meeting that the "UMNOSupreme Council hopes there will be no doubts regarding theUMNO leadership and there will be no speculation on theleadership change".

Mahathir's son Mukhriz Mahathir, who has some support inthe party, fell into line. "I would support any action thatwould regain the confidence towards the PM," he told a newsconference.

Barisan Nasional won just half the popular vote and 62percent -- down from 90 percent -- of the seats in the222-member national parliament. The MCA saw their strength inparliament halved from 31 to 15, while MIC lost two-thirds oftheir seats.

A protest vote from ethnic Chinese and Indians, upset overwhat they saw as racial inequality in terms of business, joband education opportunities, had been expected.

But Malays, who are all Muslims and traditionally supportBarisan, completed a perfect storm for the government, givingthe opposition Islamists a record vote to protest risingprices.

Without a two-thirds parliamentary majority, Barisan can nolonger change the constitution or make some key appointments.

(Reporting by Jalil Hamid; Writing by Bill Tarrant; Editingby Jeremy Laurence)