A recount is under way in Kelantan because of the small margin of the Islamic party PAS victory.

According to official results, PAS won 19 of the state legislative assembly seats in Kelantan, against the ruling coalition Barisan Nasional's 18 in a cliffhanger contest. Votes for nine of the state's legislative constituencies were being recounted.

Either party needs to win at least 23 seats of the 45 seats at stake for a simple majority and earn the right to form the state government.

Prime Minister Abdullah Ahmad Badawi's coalition has already won nearly 90 percent of the 219 parliamentary contested seats, giving it the more than two-thirds majority he said would give him a strong mandate to fight corruption and carry out important economic reforms.

The BN also fashioned a stunning victory to recapture the key northern state of Terengganu from PAS.

He is to be sworn in as prime minister later today and is expected to announce his new cabinet line-up within days.

Political stability

Analysts said the defeat of the fundamentalists augured well for regional political stability and put Malaysia, one of the most developed nations in the Islamic world, in a position to reap a bonanza from international investors.

"The bottom line here is that Abdullah's administration has made the right moves in terms of trying to attract foreign investors. Local investors have to take heart from this by putting in more money," said regional economist Song Seng Wun from G.K. Goh brokerage in Singapore.

Barclays Capital analyst Dominique Dwor-Frecaut said the landslide win vindicated Abdullah's brand of "progressive and tolerant Islam" as opposed to PAS's conservatism.

"This victory of moderate and progressive Islam is also positive for regional stability, with the improvement in relations between Singapore and Malaysia expected to continue," he said.

"Furthermore, Malaysia stands to become an example of moderate and enlightened Islam against extremist Islamic movements in Indonesia and the Philippines, while it will continue to collaborate closely with the US in the war on terrorism."

This will augur well for "more capital inflows" and a continuation of a pick-up in the equity markets, Dwor-Precaut said, adding however he did not forsee a lifting of the peg of the ringgit currency against the dollar.

Test case

Chia Woon Khien, an economist with Southeast Asia's biggest lender DBS Bank, agreed on the positive impact of the ruling coalition's win on regional stability.

"If the (National Front) had lost badly in Malaysia's Islamic fundamentalist states, concerns - warranted or otherwise - about whether Al-Qaeda's influence has penetrated Malaysia and its surrounding region would be raised."

Andrew Tan, a security analyst with the Institute of Defence and Strategic Studies in Singapore, said the Malaysian elections were a test case of whether Islam was compatible with economic progress.

"This was really a battle for hearts and minds and an example to the rest of the world. It was also a test case as to whether Islam is compatible with development and I think (Abdullah) has made a very strong argument that it is," Tan told AFP .

"This is something that could very well be crucial in turning back the tide of fundamentalism, not just in Malaysia but also elsewhere." - AFP