July 23 (Bloomberg) -- Prime Minister Recep Tayyip Erdogan called his victory in Turkey's election a boost for democracy in the Muslim country, where the secularist military is challenging the scope of his Islamic-rooted party's power.

``We've passed an important test of democracy that is an example to the world,'' Erdogan told a cheering crowd of thousands gathered late yesterday at his party's headquarters in the capital Ankara. ``The people have pronounced the Justice and Development Party as the central political power in Turkey.''

Erdogan, 53, secured the largest share of votes in a Turkish election since 1965, giving him a mandate to bring the nation closer to the European Union and weaken the political influence of the military, which moved to block his choice for president three months ago.

Justice took 47 percent of the vote with all ballots counted, more than twice the share of its nearest rival. A projection by the CNN Turk news channel gave the party 340 seats in the 550-seat parliament.

Justice's victory ``shows that the `them and us' distinction which was valid in the pre-election period has now been entirely removed,'' said Guler Sabanci, chairwoman of Haci Omer Sabanci Holding AS, which controls lender Akbank TAS, Turkey's biggest company by market value. ``It is now the party of the center, not only the party of one faction,'' Sabanci said in an e-mailed response to questions.

Economic Confidence

Confidence in Turkey's $400 billion economy was shaken in April after Erdogan sought to elect Foreign Minister Abdullah Gul, a pious Muslim and a longtime confidant, as president in defiance of the military. Gul's wife, like Erdogan's, wears the Islamic-style headscarf that's seen as a symbol of political Islam.

The military has traditionally enforced stability in Turkey and the separation of mosque and state, ousting four governments since 1960.

Erdogan said his party wouldn't seek to compromise Turkey's secular principles. ``Our success in the election won't spoil us, it increases our responsibility,'' he told his supporters late yesterday. ``We feel that responsibility on our shoulders.''

The Constitutional Court on May 1 blocked Gul's candidacy on a technicality, prompting Erdogan to bring forward the parliamentary election from November in a bid to affirm his mandate. In yesterday's elections, Justice increased its popular support by 13 percentage points over the 2002 election that brought it to power.

`Vibrant Democracy'

``It was a free and fair election, and Turkey remains an important ally of the U.S.,'' White House spokesman Tony Snow said today in Washington. The U.S. Embassy in Ankara applauded Turkey's ``vibrant democracy.''

The ISE National-100 stock index in Istanbul gained 5.1 percent to a record 55,625.44, extending a 12 percent rally this month on expectations that Erdogan would retain power. The lira gained 1.8 percent to 1.25 against the dollar, and bond yields fell 29 basis points to a 13-month low of 17.17 percent. A basis point is 0.01 percentage point.

``Definitely the market reaction will be positive, but starting from mid-August, we'll be concentrating on the presidential election,'' said Ozgur Altug, chief economist at Raymond James Securities in Istanbul.

The process for the next parliament to resume the process of electing a president is likely to begin in mid-August, based on a preliminary government schedule.

`Some Kind of Consensus'

Egemen Bagis, an adviser to Erdogan, said in an interview that the government may seek support for Gul's candidacy from the Nationalist Action Party, which was voted into parliament in the election. ``We will find some kind of consensus,'' he said.

Cihan Pacaci, general secretary of the Nationalists, said the party won't seek to create tensions and believes the presidential election shouldn't be approached ``just in terms of whether the candidate's wife wears a headscarf.''

Erdogan told reporters in Ankara today he hadn't decided on a new candidate for the presidency, though he added that ``Abdullah Gul's thoughts and intentions will be extremely important for me.''

`More Ambition'

European Commission President Jose Barroso wished Erdogan success in his pledges to ensure that Turkey takes ``sustained movement towards the European Union.'' U.K. Prime Minister Gordon Brown said he hoped the Turkish election will boost ties with the EU. Foreign Minister Ursula Plassnik of Austria, which opposes Turkish membership, said she expects ``more ambition'' from Turkey after the election.

The election will also give Erdogan a vote of confidence to push ahead with economic measures that brought record foreign investment of $20 billion last year. The economy has grown for 21 straight quarters, the longest period since modern Turkey was founded in 1923.

Some of Erdogan's foes, citing what they see as threats to the secular code of the nation's founder, Mustafa Kemal Ataturk, say he is trying to bring Iran-like Islamic restrictions to Turkish society. Justice favors lifting the ban on the wearing of the headscarf in government buildings.

``The balance of power in Turkey is shifting toward a new Turkey, empowering conservatives who are more open to democracy and the global economy than their secular counterparts,'' said Wolfango Piccoli, an analyst at the political-risk consulting firm Eurasia Group in London.

Justice's legislative majority will be reduced by a few seats -- it had 352 before the election -- because of the entry of the Nationalists into parliament.

The Republican People's Party, Erdogan's main political rival, took 21 percent of the vote, and the Nationalists 14 percent, passing the 10 percent threshold for parties to enter the legislature.

Twenty-seven politicians, many of them backed by Turkey's main pro-Kurdish party, are likely to enter parliament as independent deputies, according to CNN Turk.

To contact the reporter on this story: Mark Bentley in Ankara at mbentley3@bloomberg.net.

Last Updated: July 23, 2007 12:51 EDT