By Jonathan Barrett and Tom Westbrook
SYDNEY (Reuters) - Australia's political parties began horsetrading on Sunday to break an anticipated parliamentary deadlock after a dramatic election failed to produce a clear winner, raising the prospect of prolonged political and economic instability.
The exceptionally close vote leaves Prime Minister Malcolm Turnbull's center-right Liberal Party-led government in a precarious position, potentially needing the support of independent and minor parties.
It has also opened the door to the possibility, albeit less likely, that the main opposition Labor Party could win enough backing from the smaller parties to form government itself, althoughTurnbull said on Sunday he remained "quietly confident" of returning his coalition to power for another three-year term.
"I can promise all Australians that we will dedicate our efforts to ensuring that the state of new parliament is resolved without division or rancor," Turnbull told reporters in Sydney.
He said he had already spoken to the smaller parties - or crossbench - that may ultimately decide who governs.
"We always seek to work constructively with all of the members of the parliament as indeed we have sought to do in the past," he said.
Bill Shorten, the leader of the opposition Labor Party, said Australians had clearly rejectedTurnbull's mandate for major economic changes like cuts to healthcare and A$50 billion ($37 billion) in corporate tax cuts over 10 years.
"What I'm very sure of is that while we don't know who the winner was, there is clearly one loser: Malcolm Turnbull's agenda for Australia and his efforts to cut Medicare," Shorten told reporters in Melbourne, referring to the state healthcare service.
The election was meant to put a line under a period of political turmoil which has seen four prime ministers in three years. Instead it has left a power vacuum in Canberra and fueled talk of a challenge to Turnbull's leadership of the Liberal Party, less than a year after he ousted then prime minister Tony Abbott in a party-room coup.
If the coalition fails to form a government, it would be the first time in 85 years an Australian ruling party has lost power after its first term in office.
The uncertainty is likely to spook markets when they reopen on Monday, with analysts warning Australia's triple A credit rating could be at risk and predicting a fall in the Australian dollar and the share market.
Vote counting from Saturday's poll could take a week or more, and the coalition will rule under caretaker provisions in the interim.
Official electoral data for the House of Representatives showed a 3.4 percent swing away from the coalition government, with about two-thirds of votes counted.
The coalition was expected to hold 67 seats in the lower house, against Labor's 71 seats and five to independents and the Greens Party. A further seven seats were in the balance.
That leaves a small group of independents, whose election campaigns ranged from anti-foreign ownership and economic protectionism to anti-gambling and policies to improve the treatment of asylum seekers, as kingmakers.
Small parties are also likely to do well in the Senate, with Pauline Hanson's One Nation on track to win between two and four seats, marking the return of the right-wing anti-immigration activist to parliament after an almost 20-year absence.
BALANCE OF POWER
The Liberal-National coalition and Labor Party require 76 seats in the House of Representatives to form government, putting the negotiating skills of Turnbull and Shorten in the spotlight.
Independent politician Andrew Wilkie said Turnbull had called him just to "open lines of communication".
He said voters turned away from the major parties at the poll because there was a growing "political ruling class obsessed with their self-interest, out of touch with the community".
Speculation has also begun about the ability of Shorten and Turnbull to hold onto the leadership of their parties.
Turnbull was under the most pressure, having ousted Abbott on a promise of stability and then called the election in a risky bid to sweep out independents in the upper house who were blocking his economic agenda.
Turnbull had some of the highest poll ratings of an Australian leader on record shortly after he snatched the top job from Abbott in September.
But that popularity soured as he appeared to bend his center-right values on issues like climate change and same sex marriage under pressure from right-wing powerbrokers in his party.
(Writing by Jane Wardell; Editing by Nick Macfie and Stephen Coates)