By Huseyin Hayatsever and Jonathan Spicer
ANKARA (Reuters) -President Tayyip Erdogan led comfortably in the first round of Turkey's election on Monday, with his rival facing an uphill struggle to prevent him extending his rule into a third decade in a runoff vote on May 28.
Turkish assets weakened on the news, which showed Erdogan just below the 50% threshold needed to avoid sending the NATO-member country to a second round of a presidential election viewed as passing judgment on his autocratic rule.
Erdogan's People's Alliance, comprising his Islamist-rooted AK Party and its nationalist partners, also appeared set to win a majority in the new parliament with 321 of the 600 seats, further boosting his chances in the presidential runoff.
"The winner has undoubtedly been our country," Erdogan said in a speech to cheering supporters at the headquarters of his ruling Islamist-rooted AK Party in the capital Ankara overnight.
Before Sunday's election, the opposition had sensed its best chance yet of unseating Erdogan, bolstered by polls showing him trailing his main challenger Kemal Kilicdaroglu. But the results suggested that Erdogan and his AK Party had been able to rally conservative voters despite a cost-of-living crisis.
Kilicdaroglu, head of a six-party alliance, vowed to prevail in the runoff and accused Erdogan's party of interfering with the counting and reporting of results. He called on his supporters to be patient, but they were downcast on Monday.
"We are sad, we are depressed about the whole situation. We expected different results," said commuter Volkan Atilgan as he sat near a ferry station in Istanbul. "God willing, we will win this victory in the second round."
By contrast, Erdogan supporters were jubilant as the results filtered out, with cyber security engineer Feyyaz Balcu, 23, confident that Erdogan could fix Turkey's economic woes.
"It is very important for all Turkish people that Erdogan wins the elections. He is a world leader and all the Turks and Muslims want Erdogan as president," he said.
PIVOTAL ELECTIONS
With 99% of ballot boxes counted, Erdogan led with 49.4 of votes and Kilicdaroglu on 44.96%, High Election Board chairman Ahmet Yener told reporters. Turnout was a very high 88.8%.
The third candidate, nationalist Sinan Ogan, took 5.2% of the vote and analysts said he could play a "kingmaker" role in the runoff if he decides to endorse one of the two.
The prospect of Erdogan's rule entering a third decade will upset civil rights activists campaigning for reforms to undo the damage they say he has done to Turkey's democracy.
Thousands of political prisoners and activists could be released if the opposition prevails.
Stocks fell, the lira was near a two-month low, sovereign dollar bonds fell and the cost of insuring exposure to Turkey's debt spiked. Analysts voiced concern about the uncertainty and lessening prospects of a return to economic policy orthodoxy.
"Erdogan has now a clear psychological lead against the opposition," said Teneo co-president Wolfango Piccoli. "Erdogan will likely double down on his national security focused narratives over the next two weeks."
Echoing that view, Galip Dalay, associate fellow at Chatham House, said: "During the campaign period ahead of the runoff, President Erdogan is likely to emphasise stability as he already retains the majority in the parliament."
The election has been closely watched in Europe, Washington, Moscow, and across the region, where Erdogan has asserted Turkish power while strengthening ties to Russia and putting strain on Ankara's traditional alliance with the United States.
Erdogan is one of President Vladimir Putin's main allies and his strong showing is likely to encourage the Kremlin but unnerve the Biden administration, as well as many European and Middle Eastern leaders who had troubled relations with Erdogan.
SUBDUED OPPOSITION
The political uncertainty is expected to weigh on financial markets over the next two weeks. Overnight the lira hit a new two-month low against the dollar, weakening to 19.70 before edging back to 19.645 by 0600 GMT.
The cost of insuring against Turkey defaulting on its sovereign debts surged to a six-month high, jumping 105 basis points (bps) from Friday's levels to 597 bps, according to S&P Global Market Intelligence.
The mood at the opposition party's headquarters had been subdued overnight as the votes were counted. Before the election, opinion polls had put Kilicdaroglu slightly ahead, with two polls on Friday showing him above the 50% threshold.
The opposition had expected to benefit from voter anger at economic woes after an unorthodox policy of low interest rates triggered a lira crisis and soaring inflation. A slow government response to earthquakes that killed 50,000 people in February had also been expected to influence voters.
Kilicdaroglu has pledged to revive democracy after years of state repression, return to orthodox economic policies, empower institutions that lost autonomy under Erdogan and rebuild frail ties with the West.
Critics fear Erdogan will govern ever more autocratically if he wins another term. The 69-year-old president, a veteran of a dozen election victories, says he respects democracy.
(Reporting by Mehmet Emin Caliskan, Jonathan Spicer, Can Sezer, Ezgi Erkoyun, Karin Strohecker;Writing by Daren Butler;Editing by Tom Perry and Gareth Jones)
