By Karima Anjani and Sunanda Creagh

JAKARTA (Reuters) – Indonesia’s president may tap an Islamist party with a tough stance on graft for his coalition, as well as other groups ahead of presidential elections in July, aiming for a stable and united alliance to improve governance.

Coalition-building by President Susilo Bambang Yudhoyono’s Democrat Party could take days or even weeks, and will ultimately dictate the pace of reform in Southeast Asia’s biggest economy.

Party leaders have already held a flurry of talks in recent days in a rush to start building powerful pacts.

Fewer than one million votes from 170 million registered voters have been counted by the general election commission so far, with initial results based on quick counts from sample polling stations.

While the Democrat Party won the most votes, at around 20 percent, it was less than the nearly 30 percent that some opinion polls had predicted. That has forced the Democrats into coalition talks before the more important presidential vote that Yudhoyono, Indonesia’s most popular party leader, is tipped to win.

“What we see now is merely discussion” said Anies Baswedan, a political analyst and rector of Paramadina University in Jakarta.

As Indonesia feels the effect of a global economic downturn, attention will focus on who Yudhoyono, 59, picks as political allies, because of the impact on cabinet posts and policy-making.

Indonesia needs to woo billions of dollars of investment to address its creaking infrastructure, create jobs, and achieve a faster pace of growth, which is set to slow to 3-4 percent this year, from 6.1 percent in 2008. Endemic graft, red tape and legal uncertainty still deter investors and needs to be addressed.

Yudhoyono, a reform-minded ex-general, won Indonesia’s first direct presidential election in 2004 on promises to crack down on corruption, boost economic growth and create jobs.

But because his party won a small share of the seats in 2004, he had to offer some cabinet posts to political allies, a move which thwarted reform and slowed down decision-making.

On Friday, Yudhoyono stressed he wanted a committed coalition this time and said it could include the Prosperous Justice Party (PKS), an Islamist party which has done well in some key local elections because of its emphasis on clean, efficient governance, but which could also alienate minorities and moderates.

“It’s difficult because (Yudhoyono) could lose votes, it may cause people to stay away from him as the nationalists aren’t comfortable enough to be partners with PKS,” said Baswedan.

Yudhoyono also appeared to leave the door open to extending an alliance with the Golkar Party, the long-time political vehicle for Suharto, the country’s late autocratic ruler.

ELECTION HITCHES

Thursday’s parliamentary elections, a massive exercise in democracy in the 17,000-island archipelago, went relatively smoothly, but were marred by violence in Papua, east Indonesia, and hitches with voter lists and distribution of ballot papers.

The Democrats almost tripled their vote from 7.5 percent in 2004, as Yudhoyono has delivered strong economic growth and brought relative peace and stability to the world’s most populous Muslim nation, which also has sizeable religious minorities.

In contrast, two main parties from the Suharto era — former President Megawati Sukarnoputri’s PDI-P and Vice President Jusuf Kalla’s Golkar Party — did worse in this election, snaring about 14 percent of the votes.

Those two parties are seen as potential coalition partners, but Megawati also met Prabowo Subianto of the Greater Indonesia Movement (Gerindra).

“We will meet more intensively over the following days. Between us, we share many values, many common attitudes views and many nationalist values,” Prabowo said after meeting Megawati on Saturday.

If Yudhoyono sticks with his current alliance with Golkar and Islamist parties, analysts said this would lead to a slower pace of reform, but they still expect market-friendly policies, particularly if Yudhoyono keeps his respected finance minister, Sri Mulyani Indrawati, and other technocrats in the cabinet.

An alliance with PKS and other Islamic parties would allow Yudhoyono a freer hand to fight graft and cut bureaucracy. But it could also lead to more sharia-style laws or policies similar to a controversial anti-pornography law passed last year, and alienate secular supporters and religious minorities.

(Additional reporting by Muklis Ali and Olivia Rondonuwu; Writing by Sara Webb; Editing by David Fox)