ATHENS, Oct 4 (Reuters) - Greece's Socialists on Sunday won a landslide election victory on promises they would tax and spend to battle an economic crisis that the incumbent conservatives failed to get to grips with.
In a clash between heirs of famous political dynasties, socialist PASOK leader George Papandreou defeated outgoing prime minister Costas Karamanlis at the third attempt, having lost the last two elections in 2004 and 2007.
Cheering, drums and horns echoed through central Athens and the streets were awash in green flags and dancing supporters.
'Today we change the course for Greece and for our lives. Today we start a great national effort to put our country on a course of recovery, development and creation,' Papandreou told reporters after claiming victory in front of a cheering crowd.
According to an Interior Ministry projection, PASOK will hold a comfortable majority in parliament at a time when the Mediterranean country, seen as the euro zone's weakest link, needs a strong government to deal with an economy on the verge of recession.
Papandreou, 57, had promised a 3 billion euro ($4.36 billion) stimulus package on a platform of taxing the rich and helping the poor, while Karamanlis, 53, called for two years of austerity.
Karamanlis conceded defeat at the election centre in central Athens and resigned from his party's leadership.
'I want to congratulate George Papandreou for his victory,' he told reporters. 'Our government faced the storm of the most serious post-war crisis... Citizens did not approve my plan.'
Opinion polls had indicated Greeks were fed up with five years of conservative rule that started with high hopes for ending endemic corruption but soon sank into scandal.
'We feel like a heavy weight has been lifted,' said PASOK supporter Litsa Moraitou, 55. 'They had promised to fight corruption but it was a lie. Now we can hope again.'
With 50 percent of the ballots counted, PASOK had 43.6 percent of the vote and New Democracy trailed behind with 35 percent. The ministry projection, which put PASOK at nearly 44 percent of the final vote, gave the party 160 out of 300 seats.
The soft-spoken Papandreou, born in the United States, has fought hard to escape the heavy shadow of his legendary father and PASOK founder Andreas. Karamanlis, a powerful speaker, is the nephew of elder statesman Constantine Karamanlis.
Markets were likely to be pleased with the result.
'Not because they have a preference between the two parties but because a new government with a parliamentary majority will have a fresh mandate to pursue its programme over a four-year term,' said Alexander Moraitakis, president of the Greek brokers association SMEHA.
Weakened by the scandals and a fragile parliamentary majority, Karamanlis called the snap poll, gambling he had a better chance of winning now than later in his four-year term.
Papandreou will face a budget deficit topping 6 percent of Gross Domestic Product, rising unemployment and deep unhappiness with the education system, social security and immigration.
'The main challenge for the new government is to submit a credible budget and a realistic timetable for reducing fiscal imbalances,' said Nikos Magginas, an economist at National Bank.
After years of robust growth, Greece's output, about 2.5 percent of the euro zone's total economy, is set to slow to zero growth or even enter negative territory this year, with key drivers and job providers like tourism particularly hard-hit.
Economists question the wisdom of Papandreou's spending plan, saying it may lead to more borrowing in a country which already has the euro zone's second biggest debt after Italy as a percentage of GDP.
(Additional reporting by Renee Maltezou, Harry Papachristou, Lefteris Papadimas, Ingrid Melander and George Georgiopoulos; Editing by Sonya Hepinstall and Mark Trevelyan)
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