By Angel Krasimirov and Tsvetelia Tsolova
SOFIA (Reuters) - Bulgaria's ethnic Turkish party MRF rejected working with a nationalist party on Tuesday, scuppering chances of a broad coalition government and deepening the political stalemate in the European Union's poorest country.
The nationalist Attack has emerged as kingmaker after an inconclusive election on Sunday. But its anti-Roma and anti-Turkish policies and pledges of nationalizations may alarm the EU and make it difficult for other parties to work with.
"There can't be a coalition between MRF and Attack in any form," MRF leader Lyutvi Mestan told national radio station BNR. "This would be an absolute distortion of policy and I will not participate in this process."
Other parties refuse to work with the largest group, the center-right GERB, because of its tarnished reputation after it resigned from government in February but they are struggling to achieve a majority without it.
Turnout in the election was the lowest in Bulgaria's post-communist history at 51 percent, reflecting deep discontent among many voters with a political class they view as corrupt and self-interested, and a lack of viable alternatives.
Businessmen fear that an unstable government or a broad coalition may pursue policies such as unsustainable wage increases and nationalizations to buy popularity and keep itself in power at any cost.
Bulgaria struggles to supply running water and reliable electricity to some of its citizens, two million of whom have left since the 1989 fall of communism. Many villages are dying, full of collapsing buildings and populated only by the elderly.
Options for a new government are limited because of the shunning of GERB. A combination of the second largest, the Socialists, and MRF - which represents ethnic Turks who make up a tenth of the 7.3 million population - would be one seat short of a majority, almost complete results show.
The only other group in the 240-seat parliament will be Attack, some of whose members style themselves as Nazis.
Socialist leader Sergei Stanishev said he would seek backing for a technocrat administration that could also draw support from protester groups that are not in parliament. It would provide a stable government, try to create more jobs and raise salaries, he said.
He may try to secure informal backing from individual GERB and Attack MPs to edge over the finishing line and urged a quick solution as he believes the interim administration is closely linked to GERB and unable to make long-term policy.
"The situation in the country requires legitimate institutions and fast action. The interim government's lack of power cannot continue," Stanishev said.
With jobless at an eight-year high and an average monthly wage of 400 euros ($520), many Bulgarians are deeply unhappy. Seven people set themselves on fire during protests against low living standards and graft and discontent may spill over again.
The political uncertainty should not undermine expected growth of about 1 percent this year but the interim government will not be able to push important health, judicial and education reforms to unlock longer term economic potential.
"Extended talks for forming a government are not so worrisome, as the interim government is not doing a bad job," said Tsvetan Simeonov, head of the Bulgarian Chamber of Commerce and Industry. "It will be much worse if we end up with a government that sends us years back."
An unstable government or a broad coalition - that spends time debating ideological issues rather than pushing policies to spur growth - would do little to reassure business, said Georgi Angelov, an economist with Open Society Institute, a thinktank.
Foreign investment in Bulgaria was only 1.5 billion euros last year and virtually dried up in the first three months.
If no group can secure a majority Bulgaria will have new elections - possibly in September - until when the interim government, which has kept debt low in the last three months, will stay in place.
But there has been little sign of renewed protests since the election, with only about 200 people rallying after polling closed, waving Bulgarian flags, burning torches and chanting "Mafia" where GERB was due to hold a press conference. ($1 = 0.7703 euros)
(Writing by Sam Cage; Editing by Angus MacSwan)