Greek Prime Minister George Papandreou ruled out calling a snap parliamentary election on Sunday after winning enough support in local polls to decide he could press ahead with a radical austerity programme.
The threat of an early election had unsettled markets and analysts said his decision had removed short-term uncertainties.
Initial official estimates put Papandreou's socialist party (PASOK) ahead in seven out of 13 regions, with the centre-right New Democracy ahead in the rest, although some races were very close and almost all were set to go to a run-off next Sunday.
"Making changes is not easy. Greek people brought us to power a year ago and today confirmed that they want this change. We will continue with our task tomorrow," Papandreou said in a televised address to the nation.
Papandreou had threatened to dissolve parliament, barely a year after coming to power, if the first round of the regional elections failed to give him a mandate to pursue budget cuts and reforms agreed in May under a 110 bln-euro EU/IMF bailout to save Greece from bankruptcy.
Analysts had said Papandreou was taking an unnecessary risk by putting his comfortable majority and the EU/IMF fiscal policies on the line at a time when Greece is scrambling to meet tough year-end targets to slash a gaping budget deficit.
Many were relieved on Sunday night, but said a high abstention rate and a narrowing of the gap between the ruling Socialists and the opposition showed risks to Papandreou's programme remained.
"The key thing is the dropping of the early elections threat, which reduces near-term uncertainty. But Greece still has to go through a very tough period and get all the policies through to stabilise its debt," said Ben May, at Capital Economics.
"The disaster scenario, if early polls were to be held, would have meant a whole lot of uncertainty. The result will be seen as positive by markets in the short term but whether it will lead to a sustained fall in yield spreads is not clear."
The spread between yields on Greek and German 10-year government bonds had risen by more than 200 basis points to above 900 since Papandreou first threatened an early national election in late October.
"FRUSTRATION"
Papandreou had played with voters' and markets' nerves by never making clear exactly how he would judge that voters had given him sufficient endorsement. In the 2009 national elections, PASOK led the vote in all 13 regions.
Some 40% of voters did not show up at the polling stations and about 10% of those who voted spoiled their papers, according to official data. At voting stations, many said they were angry with the threat of national elections.
"Voters' frustration with politics was confirmed," said Costas Panagopoulos, head of the pollster ALCO, adding that independent candidates had gathered many votes.
"All that throws doubts over the government, the impact of which we will see in the coming weeks."
In the Greater Athens region, home to almost a third of voters, PASOK remained ahead despite haemorrhaging votes to a maverick candidate expelled from PASOK's parliamentary group for voting against the austerity plan. Papandreou said his priority would be to cut the deficit and stabilise the economy, about 2.5% of the euro zone, which is set to shrink by 4% this year as austerity bites.
The Socialists came to power on plans to boost welfare spending. But they were soon forced to switch to pay cuts, tax hikes and a pension freeze after a debt crisis exploded when they revealed state finances were much worse than expected.
Unlike governing parties in other deficit-ridden countries such as Ireland and Portugal, PASOK enjoys a comfortable parliamentary majority.
