NEW DELHI - Indian Prime Minister Manmohan Singh's ruling coalition won an overwhelming election victory on Saturday, boosting hopes of a stable government as the emerging Asian power faces economic downturn and tensions with Pakistan.

Singh's Congress-led coalition, riding on the back of years of economic growth, did better than expected and will probably be only just short of an outright majority, according to data from the election commission and projections by TV channels.

The victory over the opposition Hindu-nationalist-led alliance means the left-of-center Congress may find it easier to form a stable coalition with smaller parties and be less vulnerable to pressure on issues like economic reforms

Eventually the people of India know what's good for them and they always make the right choice, Sonia Gandhi, the head of the Congress party, told reporters outside her home in New Delhi.

Congress party supporters, their arms in the air and carrying banners of star campaigners Rahul and Priyanka Gandhi, set off firecrackers in celebration on the party's return to power.

The Congress party-led coalition was projected to win 261 seats, short of the 272 needed for a parliamentary majority, state TV said. Full results are expected later on Saturday.

The Bharatiya Janata Party (BJP)-led opposition alliance would take 160 seats and a Third Front of communist and smaller groups 58 seats, the TV channel said.

The BJP effectively conceded defeat by saying that Congress had the biggest mandate.

Singh, 76, said he wanted a cabinet role for Rahul Gandhi, the scion of the Gandhi-Nehru dynasty and who is seen as having orchestrated the Congress party's resurgence in northern states.

It is my wish that he should be in the cabinet. But I will have to persuade him, Singh said.

The results should boost investor confidence and hopes for reforms. Markets had been jittery over a poor showing by either national alliance, fearing the emergence of a weak coalition.

This is a dream for the market. You could not have thought of anything better than this. Get ready for a 7-8 percent rally in the stock market on Monday, Samir Arora, a fund manager at Helios Capital management in Singapore.

About 714 million people were eligible to vote in the largest such exercise in the world staggered over a month to allow security forces to supervise the vote.

ECONOMY, GANDHI

India's booming economic growth for the past four years, including rising rural incomes, may well have worked for the Congress-led coalition headed by the reformist Singh.

A severe financial downturn that began last year and is continuing in Asia's third largest economy appeared to have had little impact on the fortunes of the ruling alliance.

It seems to me that we must acknowledge the economy, said political analyst Mahesh Rangarajan. Despite the slowdown in the economy in the last year, these four or five years have been among the best in India's recorded economic history.

A tireless campaign by Rahul Gandhi was also was a factor in the election, Congress supporters said.

We want Rahul Gandhi to be the prime minister as soon as possible, he is a great leader and we all love him. said Vandana, a student supporter.

The election was a setback for regional, caste-based parties and the communists who were once seen as indispensable for any coalition formation.

The communists, who were trailing in their bastion states, broke away from Singh's coalition last year, angry over a civilian nuclear energy deal with Washington seen as undermining national sovereignty.

Mayawati, the controversial chief minister of Uttar Pradesh who was tipped as a possible kingmaker, did not make significant electoral gains to wield influence in a possible coalition.

The pressure will be much reduced. You will not have a government hostage to smaller parties, said Anand Sharma, junior foreign minister in the government.

(Additional reporting by Reuters reporters; Editing by Alistair Scrutton)

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