By Conor Humphries and Padraic Halpin
DUBLIN (Reuters) - Europe's debt crisis was set to claim its first political scalp on Friday as Ireland voted in an election dominated by the trauma of economic collapse and the harsh path back to financial stability.
Voters are in a vicious mood over the bursting of a property bubble that has left them steeped in debt and facing years of austerity to repay the European Union and the International Monetary Fund for an 85 billion euros bailout.
The ruling Fianna Fail party is braced for a record kicking, with polls suggesting it will only retain around 20 seats in the 166-seat parliament, ending the dominant position it has commanded since independence from Britain in the last century.
"We've been waiting for this day for a while now," said John Sweeney, a 36-year-old accountant, voting at a community centre in Dublin's inner city. "It's time to get Fianna Fail out and keep them out."
Buoyed by its arch-rival's woes, the centre-right Fine Gael party will almost certainly lead that government. Surveys signal it could win nearly 80 seats, putting it within reach of forming a single-party administration for the first time ever.
Most analysts expect a Fine Gael government will form a coalition government with the centre-left Labour Party to navigate the early years of the EU/IMF programme.
Despite the pre-election invective being hurled between Fine Gael and Labour, the two parties have a history of working well in government and both have campaigned for a mandate to renegotiate the terms of the EU/IMF package, widely seen in Ireland as punitive.
BATTLE WITH BRUSSELS
Fine Gael's leader Enda Kenny has already paid pre-election visits to Brussels and Berlin but any loosening of the terms for Ireland's loans will be agreed as part of an overall European package to deal with the region's debt crisis in two summits next month.
While there is hope that Ireland's borrowing costs may be reduced as part of a wider deal, Dublin is unlikely to be given a green light to impose losses on some senior bondholders in Irish banks in the face of ECB opposition.
Financial markets have already priced in the fact that Fine Gael will lead the government, but are watching to see how big a majority it will secure, analysts said.
"You could see some relief rally if there is a clear majority for a new government and it's formed quickly," said Anders Matzen, chief analyst at Nordea Markets in Copenhagen. "But a drawn-ut debate with the EU and IMF over a renegotiation of the package could be detrimental to sentiment."
British bank Lloyds booked a 4 billion-pound hit from Irish bad debts on Thursday, while Irish losses at rival Royal Bank of Scotland almost doubled to 3.9 billion pounds.
Even with more relaxed borrowing terms, Ireland will still have to get the worst budget deficit in Europe under control by 2015 and if growth falters additional cuts may be needed, ensuring a short honeymoon for the new government.
The biggest fault-line between Fine Gael and Labour is over the deadline to tackle the deficit. Labour wants an extra year, 2016, to get it under 3 percent of GDP, the EU limit, from nearly 12 percent of GDP, on an underlying basis, last year.
Despite the return of mass emigration, one in 10 unemployed, widespread negative equity and a rising suicide rate, Ireland has not experienced the kind of mass public protests seen in fellow euro zone struggler Greece.
Hard-left parties, including the nationalist Sinn Fein, have seen a surge in support on promises to rip up the bailout deal, but are expected to remain a small minority in parliament given voters' preference for low-ax parties.
The expected humiliation of Fianna Fail, which has run the country for 61 of the past 79 years, would mark a watershed. If it does only secure around 20 seats, down from 78 in an election four years ago, it will be the sharpest collapse of support for any Irish party in history.
Voting in Friday's elections will be from 7:00 a.m. to 10:00 p.m. and the first exit polls with be released early on Saturday. Manual counting under Ireland's system of proportional representation is likely to continue into Sunday.
"There is a seething anger, and the election is acting as a pressure valve," said David Farrell, a politics professor at University College Dublin. "But the incoming government won't have much of a honeymoon either.
(Editing by Carmel Crimmins and Andrew Roche)
