By Jonathan Thatcher
JAKARTA (Reuters) - An unexpectedly weak election result for the party behind the frontrunner to be Indonesia's next president hurt stocks and the currency on Thursday, with concern Southeast Asia's biggest economy could be heading into a period of political confusion.
Early returns from Wednesday's parliamentary election show that the Indonesian Democratic Party-Struggle (PDI-P) will have no choice but to cut a deal with other parties to nominate its hugely popular candidate for president in a July 9 poll.
Investor enthusiasm for Indonesia had been on the rise on the belief that Jakarta governor Joko Widodo might even win enough votes to avoid having to go to a run-off in three months time.
"At the very least, expectations on the duration of the presidential election is likely to move from one to two rounds, which increases the period of uncertainty," Trimegah Securities wrote in a research note.
Indonesian shares fell 3 percent.
The rupiah, Asia's strongest currency this year after being its weakest in 2013, also slipped, edging down 0.3 percent to 11,320 to the dollar in early trade. It is still around its highest levels since last November while the main share index is also at its strongest level since September.
It now looks very likely that Widodo, popularly known as Jokowi, will be forced into some form of power sharing with other parties if he is to move into the presidential palace.
A party needs 25 percent of the national vote, or 20 percent of seats in parliament, to nominate a presidential candidate on its own. Less than that and the PDI-P will need to form a coalition with one or more of the other 11 parties in Wednesday's election to nominate Jokowi.
Initial results show that PDI-P won just under 20 percent of the vote, the most by any party.
Most analysts say the presidential election is still Jokowi's to lose but that Wednesday's vote shows his party had failed to capitalize on his popularity.
Though he has no experience on the national political stage, his no-nonsense style and easy approach with ordinary people has raised the former furniture businessman's profile among the country, seen by many as a welcome change from the old guard of elitist politicians who have long dominated Indonesia.
PDI-P nominated Jokowi for the presidency last month but at least one survey has shown that a sizeable chunk of the electorate was not aware.
The result of the parliamentary election was also more spread out across the country than expected, meaning a much more fragmented parliament which could hamper policy in a country which is seen as repeatedly failing to meet its economic potential.
While economic growth is slowing, it is expected to be more than 5 percent this year. But many economists say growth is held back by weak infrastructure, massive corruption and years of indecisive leadership.
In another surprise, Islamic parties looked to have picked up more support than expected. Though Indonesia is home to the world's largest Muslim population, many analysts thought Islamic parties were on the wane because of graft scandals and the greater popularity of more pluralist parties.
(Additional reporting by Eveline Danubrata and Jongwoo Cheon in Singapore. Editing by Dean Yates)