May 13 (Bloomberg) -- India’s ruling Congress party-led coalition may have won the most seats in elections without securing enough votes to form a government, exit polls predicted, threatening a political logjam and market turmoil.

Television channels released their surveys after the election ended, with all stations forecasting the Congress bloc just ahead of its chief rival headed by the Bharatiya Janata Party. Star News-Nielsen and News X put its advantage at 199 seats to 191, short of the 272 needed for a majority.

The close race raises the prospect of a repeat of 1996, when the administration collapsed after just 13 days. President Pratibha Devisingh Patil, the Congress Party’s choice for head of state, will have to decide who to call to form a government if the results released on May 16 mirror today’s exit polls.

“The President has to give the first chance to the largest pre-poll alliance or single largest party,” said E. Sridharan, a political scientist and academic director of the University of Pennsylvania Institute for the Advanced Study of India in New Delhi. “If these polls are correct then, they show either way the Congress seems to have the first-mover advantage.”

Early projections pointed to losses for communists in the state of West Bengal, whose support may be needed by Prime Minister Manmohan Singh to return to power, while Congress appeared to be picking up seats in eastern Orissa state and Kerala in the south, according to Times Now Television. Singh, 76, is the Congress party’s candidate for prime minister, while Lal Krishna Advani, 81, is the BJP’s pick.

Loose Grouping

A loose grouping of smaller parties would win around 100 seats, the exit polls showed. The Congress alliance won 217 seats in 2004, to the BJP-led bloc’s 179, and formed a government with the help of the communists.

Exit polls after that election by channels including NDTV, Zee News and Aaj Tak overestimated the strength of the then governing BJP and its allies by about 50-70 seats, suggesting they would win days before being dumped from office with just 179 lawmakers in parliament.

“I see the Congress and the UPA exceeding 210 seats,” Congress leader and federal Commerce Minister Kamal Nath said, referring to the governing United Progressive Alliance. He said the party’s lack of ideological baggage would make it possible to attract the partners needed for a majority.

Remained Upbeat

Balbir Punj, a BJP spokesman, said the party remained upbeat about its chances. “I have very little faith in these exit polls,” Punj said. “We are confident that the BJP will emerge as the single largest party and the NDA will appear as single largest group.”

With the two leading alliances both in with a chance of power, the race to rope in new allies from among smaller parties, including the Communists, will heat up, and could rattle financial markets.

Among possible kingmakers are Jayalalitha and Mayawati, who are predicted to make gains in the states of Tamil Nadu and Uttar Pradesh, raising their bargaining power.

Indian stocks dropped in U.S. trading after the exit polls, with ICICI Bank Ltd. and HDFC Bank Ltd., India’s second- and third-largest lenders, falling at least 1.6 percent on the New York Stock Exchange.

Index Plunges

After the 2004 elections, the Bombay Stock Exchange’s Sensitive Index plunged 11 percent on May 17, 2004, the most in more than a decade, as investors feared a government formed by Sonia Gandhi’s Congress party and communist allies would slow the pace of reforms. Trading was halted twice, wiping out $25 billion in market value in a day. The Sensex declined 1.4 percent today.

Whoever voters elect will have to bolster an economy that saw industrial production slump the most in 16 years in March as the global recession forced companies to pare output and curb investments.

“India needs a strong, stable coalition to make the good India story even better,” said Rajeev Malik, a regional economist at Macquarie Group Ltd. in Singapore. “Markets will remain nervous till a clear picture emerges on who will be in the hot seat to drive the economy.”

Nuclear Deal

India, a Cold War ally of the Soviet Union, moved closer to the U.S. during the administration of President George W. Bush, signing an accord that ended a ban on trade in nuclear fuel and technology imposed after India tested its first atomic bomb in 1974.

The U.S. wants Indian help in its fight against Islamic militancy in the region, especially Pakistan. Prime Minister Singh stalled a peace process with India’s nuclear-armed neighbor following last November’s terrorist attacks in Mumbai that killed 166 people.

India says a Pakistan-based militant group, Lashkar-e-Taiba, was behind the raid that raised tensions between the two countries, which have fought three wars. Pakistan has admitted planning took place on its soil. The BJP has accused Congress of being soft on terrorism following the attack and a series of bombings in major cities.

Congress, the party that has produced three prime ministers for the Nehru-Gandhi family, won 145 seats in 2004 and is hoping to become the first party to be re-elected after serving a full term since Indira Gandhi won in 1971. The Communists, who withdrew support last year over the nuclear deal, have vowed not to back Congress this time.

The BJP, which built itself into a national power from the late 1980s with a campaign to construct a Hindu temple on the site of an ancient mosque, was ousted in 2004, when it secured only 138 seats.

To contact the reporters on this story: Subramaniam Sharma in New Delhi at ssharma@bloomberg.net; Bibhudatta Pradhan in New Delhi at bpradhan@bloomberg.net

Last Updated: May 13, 2009 11:24 EDT