(updates with turnout, background, analyst comment on possible market impact)
PARIS (Thomson Financial) - Conservative Nicholas Sarkozy of the ruling UMP party is set to face socialist Segolene Royal of the PS party in the presidential run-off, following the first round of the French elections, official estimates showed.
Sarkozy, 52, is now the strong favourite to win, with virtually every poll during the campaign showing he would defeat Royal, 53, in a second round vote, although a poll Friday put them neck and neck in a run-off.
According to exit polls released just after voting closed, Sarkozy scored 29.5-30.0 pct of the vote, followed by Royal with 25.2-26.3 pct and the two will go into the second round on May 6.
The poll put Francois Bayrou of the centrist UDF party at 17.9-18.8 pct and far right leader Jean-Marie Le Pen at 10.6-12.0 pct.
All of the polling organisations agreed on the placing of the top four candidates.
The estimated turnout, at over 85 pct, is the highest for decades and compared with 70.1 pct in 2002, when many young and left-wing voters stayed away from the polls, allowing far-right leader Jean-Marie Le Pen to make it to the second round, to the shame of the majority of the French.
The result of the second round will now depend on whom the voters of the disqualified candidates will choose to turn to on May 6 and endorsements by those eliminated are eagerly awaited.
But while voters who supported the far right and far left in the first round will likely transfer these to Sarkozy and Royal respectively in the run-off, it is far less certain how Bayrou supporters will react.
Bayrou's right-leaning stance is thought to have attracted many votes from both moderate conservatives exasperated by Sarkozy's forthright manner and occasional bursts of enthusiasm for what is seen as US-style economic liberalism.
But pollsters have also ascribed his unexpected breakthrough during the campaign to support from PS voters unconvinced by Royal, who is new to national politics and seen as untried by some.
Royal is the first woman to have a realistic chance at becoming the President of France.
Last week, both Bayrou and Royal rejected calls for an anti-Sarkozy coalition ahead of round one.
Immediately after tonight's initial results, UDF chairman Herve Morin told TF1 TV that Bayrou will 'listen' to what Sarkozy and Royal have to say before giviong any endorsement and gave no timetable for this.
Sarkozy has run on a broadly business-friendly ticket that includes 68 bln eur in tax cuts over five years to lower the overall tax take by 4 pct of GDP, a relaxation of labour regulations and a pledge to reach full employment by the end of his term.
Royal, in response to criticisms that she was a Blairite alternative to the right, adopted an increasingly left-wing programme during the campaign and has said she will reverse tax cuts for the rich passed since 2002, tighten up the labour code and raise the minimum wage to 1,500 eur per month from 1,250, as soon as possible.
Analysts have warned however that both of the candidates have presented unrealistically-costed programmes that they have no firm intention of implementing and that neither has attempted to secure a mandate that can genuinely lead to successful economic reform.
The coming fortnight leading up to the May 6 run-off is likely to see both candidates staking out their ideological positions rather than jeopardize their support by discussing any tough economic decisions they may take.
Analysts told Thomson Financial News Friday that the financial markets are largely unconcerned by the first-round vote, and fully expected a Sarkozy-Royal run-off.
This appears to have been born out by trading Friday, when the benchmark CAC-40 closed up 1.88 pct to finish above 4,900 points for the first time since January 2001.
But they said indications during the fortnight until the second round that Royal could win the presidency would provoke some anxiety and notably put shares in the energy sector under pressure.
Royal has said that in the event of her victory she would scrap the proposed merger between Suez and state-owned Gaz de France which she would instead merge with a re-nationalised EDF.
Anthony Thomas, an economist at Dresdner Kleinwort says Royal has campaigned on a 'relatively left-wing socialist programme' and although she would 'no doubt have to water it down... if she were to win, I think the markets would be alarmed at the prospect.'
He warned that while a Sarkozy victory would no doubt reassure the market, 'whether he gets a large majority or a small majority he is going to have a very difficult time, he is a very divisive character.'
'In the campaign, he has been focusing on things like law and order and immigration, not looking for an out-and-out mandate for economic reform to make the market sit up and say yes, now this looks interesting.'
Thomas believes 'you might have a market bounce on the day, but I can't imagine it would last long.'
Marc Touati, an economist from the ACDE think tank does not expect a strong reaction from the market either: 'For companies on the CAC-40, 80 pct of profits are made abroad... that is why the equity markets are in a manner of speaking immune to what happens in the French political world.'
If Sarkozy wins, Touati believes there will be some relief on the markets over a victory for 'the least worst' candidate.
'If the left gets in there will be some concern and some questions on what they are going to do,' he said however.
Analysts agree that among French corporate names, GDF, EDF and Suez are the principal hostages to the outcome of the vote.
Lehmann Brothers said 'we see GDF and Suez as the most exposed to the elections, given the ongoing merger process.'
The merger between the two groups was largely orchestrated by the outgoing UMP government as a way of shielding Suez from a foreign takeover, but fell victim to the electoral timetable after a court ordered a delay in the operation until after the vote.
Lehmann said: 'In our opinion, a victory for the Socialists is likely to see the whole merger project called off, as one of Segolene Royal's manifesto items is to merge EDF and GDF.'
'Where the UMP party stands on the issues is less clear, but should Nicolas Sarkozy triumph, we would expect support for the union, despite some suggestions to the contrary, the analysts said.
Touati agreed, commenting that 'if the left wins, there will definitely be a big problem, as they have pledged to reverse the GDF deal, leaving total uncertainly, which will hurt GDF shares.'
'And what would happen with EDF? They have said they want to re-nationalize it then merge it with GDF. Brussels would never allow it.'
Among other candidates, those on the left polled as follows, according to exit polls: Olivier Besancenot of the Revolutionary Communist League (LCR) 4.1-4.7 pct; Marie-George Buffet of the French Communist party (PCF) 1.9-2.1 pct; Dominique Voynet of the Greens 1.5-1.7 pct; Arlette Laguiller of the Workers Struggle (LO) 1.4-1.5 pct; Gerard Schivardi of teh PT Workers Party at 0.3-0.5 pct and anti-globalisation candidate Jose Bove 1.0-1.3 pct.
This makes a total bloc of 10.2-11.8 pct of the vote likely to go to Royal.
On the right, pollsters estimated the scores of smaller candidates as follows: Philippe de Villiers of the nationalist (MPF) party 2.4-3.0 pct; Frederic Nihous of the CPNT ruralism and nature party at 1.2-1.5 pct.
This makes a total bloc of of 3.6-4.5 pct of votes likely to go to Sarkozy, or 16.5 pct including the score of FN National front leader Jean-Marie Le Pen, although many working-class socialist voters are thought to have supported Le Pen and may not extend this gesture to Sarkozy. tfn.paris@thomson.com mrg/gp/mrg/gp/mrg COPYRIGHT Copyright AFX News Limited 2007. All rights reserved. The copying, republication or redistribution of AFX News Content, including by framing or similar means, is expressly prohibited without the prior written consent of AFX News.