By Andrei Khalip
LISBON (Reuters) - Portugal's Prime Minister Pedro Passos Coelho is expected to form a minority government after his center-right coalition won the election but lost its parliamentary majority at the weekend, a move shrugged off by markets which see little immediate risk of instability.
Portuguese shares rose more than 2 percent, largely in line with other European stock indices, while bond yields were steady to lower in early trade on Monday after hitting their lowest level in five months soon after opening.
President Anibal Cavaco Silva must name the new prime minister after talking to all political leaders.
Passos Coelho would be the first leader in Europe to be re-elected after imposing hardships on voters under international bailout packages that followed the start of the sovereign debt crisis in 2009.
After saying he was ready to form a government while suggesting he may have to compromise on policies, most analysts saw a good chance for relative political stability and the continuation of budget consolidation policies.
Passos Coelho's defeated Socialist rival ruled out forming part of a left-wing "negative majority of those who create obstacles".
The president is expected to try to convince Passos Coelho's center-right alliance and the center-left Socialists of Antonio Costa to form a centrist coalition, but the Socialists are unlikely to agree. Passos Coelho's alliance is made up of his Social Democrats and rightist CDS-PP.
With 99.2 percent of parishes in the country counted, the ruling coalition had around 38.3 percent of the vote, while the Socialists had 32.4 percent. The final count will be announced later on Monday.
The results showed the government with 104 seats in the 230-seat parliament, short of the 116 it would need for a majority.
While most party leaders were to converge for Republic Day in Lisbon's City Hall, the president will not be there as, according to his office, "he has to focus on reflecting about decisions to be taken in the next few days".
"We'll have a minority government that will make agreements in crucial moments like the passing of budgets. Such agreements are perfectly doable with the Socialists abstaining, not only this year but in the coming years," said political scientist Adelino Maltez.
The 2016 budget is expected to be presented in the coming weeks.
"The Socialists will have to gradually become the party of the center as they failed to capture the protest vote. That bodes well for this government surviving the next four years, if there is no social crisis," Maltez said.
Markets appeared to brush off concerns about a minority government in the country of 10 million even though there is no history of minority administrations surviving a full term in Portugal since the 1974 overthrow of the fascist regime installed by dictator Antonio Salazar.
"It's likely to be a minority government formally, but the Socialists are fairly close in their views on budget consolidation with the government. So we see all of this as reassuring and do not expect any impact on the economic outlook in the short run," said Citi economist Giada Giani.
"In the longer run, the ability to pass reforms may be somewhat diminished," she said.
Passos Coelho's coalition government raised taxes while cutting public spending, but argued during the campaign that the country was now beginning to see the fruits of those measures with a gradual return to growth after three years of recession.
The election was the first since Portugal exited an international bailout last year.
(Reporting By Andrei Khalip; Editing by Janet Lawrence)