By Patrick Lannin and Andrius Sytas
VILNIUS (Reuters) - Lithuania's president on Monday vetoed a proposed coalition government, saying one of the three parties involved stood accused of serious voter fraud in a weekend election and was therefore unfit to govern.
President Dalia Grybauskaite's surprise intervention cast a cloud of uncertainty over the aftermath of the election - which turned into a vote against austerity - setting up a possible standoff or new talks on forming a different government.
The party accused of fraud, the Labor Party, strongly denies wrongdoing. "The principle of the presumption of innocence must be kept to," said Viktor Uspaskich, the party's leader. "The will of the people must not be spat upon".
The election put centre-left parties promising to ease the impact of austerity in pole position to form a new coalition, but the president's gambit gave Prime Minister Andrius Kubilius an opening to stay in power or have a role in a new coalition.
The opposition Social Democratic Party, the Labor Party and the party of an impeached former president held a meeting in the early hours of Monday to discuss a coalition.
But Grybauskaite said she refused to back a coalition which included Labor, which stands accused of buying votes during the two rounds of voting.
"A party which is suspected of gross violations in the election, which is suspected of false accounting and non-transparent activities cannot participate in the government's formation," the president told reporters.
Grybauskaite, 56, a former European Union budget commissioner, is popular with voters. Under the constitution she has the power to nominate the country's prime minister.
She said police were investigating 27 election irregularities, 18 of which concerned alleged vote buying, with the Labor Party accused of involvement in most of them.
Separately, Uspaskich, is also on trial for alleged tax fraud at his party from 2004-2006, something he denies. The party increased its seats in parliament to 29 from 10.
"We call our state a democratic state, ruled by law," Uspaskich said on public television.
Grybauskaite said she would eventually probably name Social Democrat Party leader Algirdas Butkevicius as prime minister.
After morning meetings, political parties retired to discuss a way forward. No talks were planned between Butkevicius and Kubilius. Kubilius has said the ball is in Butkevicius's court.
Butkevicius, a former finance minister, told reporters he could not say whether Labor would be in government or not.
Kubilius won praise abroad for slashing Lithuania's budget deficit after a brutal economic crisis began four years ago.
The economy has now returned to growth, and rose a faster-than-expected 4.4 percent in the third quarter.
But the outgoing premier saw his popularity slide at home as wages fell, unemployment rose and tens of thousands of people left the small Baltic country in search of work.
Butkevicus has said he would stick to fiscal responsibility and aim to take Lithuania into the euro zone in 2015.
Economists said he would have little choice but to keep a tight rein on spending as Lithuania remained highly indebted and needed to maintain the trust of financial markets.
Butkevicius has also backed better ties with Russia.
Analysts said Grybauskaite's gambit could result in a rainbow coalition between the Social Democrats and Kubilius or the formation of a minority government.
"I am very surprised," said political scientist Kestutis Girnius of the president's move. He said a rainbow coalition would be strong in parliament, but a bitter pill for Butkevicius, whose party won the election with 38 seats.
"They would be a junior member of the coalition," he said, referring to the fact that Kubilius and an allied liberal party would be able to out-vote the Social Democrats in such a coalition.
Political commentator Arturas Racas said Butkevicius had three choices - to defy the president and risk confrontation, to go for a minority government that would seek support in parliament from the center-right or form a coalition with the conservatives.
"It all depends on how strong Butkevicius is," he said.
(Editing by John Stonestreet and Andrew Osborn)
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