CANBERRA: Australia faces a week of political wrangling as votes were counted on Monday from an inconclusive election, with financial markets rowing back on early expectations of a minority conservative government.

Online bookmakers changed their betting to make Prime Minister Julia Gillard`s Labor favorite to lead a government with a handful of independents after putting their money on the conservatives.

Latest official counting gave Labor 72 seats to the conservative`s 69, short of the 76 seats needed to form government. A respected ABC pollster predicted both would fall short with 73 seats each, leaving three independents and a Green MP kingmakers.

Gillard and opposition leader Tony Abbott both flew to the national capital Canberra on Monday to hold talks this week with the crossbench MPs, who remain uncommitted to either side.

The prospect of a conservative government, which would kill Labor`s plans for a 30 percent mining tax and a carbon price, saw the Australian dollar claw back early falls, while mining stocks ended the day slightly up.

Economic analysts said while investors did not like the uncertainty, Australia`s stable economic fundamentals and tradition of political stability had lessened concerns.

"The resilience of the Aussie, in spite of the weekend events can be viewed as a vote of confidence in the overall economic conditions in Australia," said one currency analyst.

IG Markets analyst Cameron Peacock said: "Canada`s got a hung parliament at the moment with a minority government. It`s recently happened with David Cameron in the U.K. It`s probably becoming more common. It certainly can be worked around."

Gillard, setting out her case for power, said the government had attracted the majority share of the two-party preferred vote. "What that means is that the majority of Australians wanted a Labor government," she said.

The scenario of a minority conservative government, on the other hand, rests on opposition leader Tony Abbott receiving a larger number of seats than Labor, and assumptions that the independents would naturally align themselves to the conservatives.

But independent Tony Windsor, challenged that assumption, saying he had long ago quit as a member of the National Party, which makes up half of the conservative coalition.

"I gave up smoking at the same time. I`ve ridden myself of two cancers," Windsor told local television.

Australia`s Governor-General Quentin Bryce, who may be called on to break the deadlock as the Queen`s representative, said she was taking advice on her role as her daughter was married to a senior ruling Labor lawmaker, clouding her impartiality.

New Green MP Adam Bandt has said he is more likely to support Labor than the conservatives. He and the independents are under pressure to support the party that ends up with the most seats.

All three independents have promised to keep open minds in talks with leaders of both major parties.

"We can make this work I think if the major parties actually move away from this dog against dog attitude that they`ve had through the election campaign and look to the national interest on this," said Windsor.

INVESTORS SEE NO MORE MINING TAX

Australian stocks rose on hopes Gillard would fail to form a government, spelling the end of her 30 percent tax on major iron ore and coal mines, which the conservatives have vowed to scrap.

The mining index firmed 0.6 percent, led by shares in the world`s second-largest iron ore miner, Rio Tinto, up 0.9 percent, and the third-largest iron ore producer, BHP Billiton, up 0.5 percent.

Shares in Australia`s largest phone company, Telstra, sank 6.4 percent, partly on concerns that an A$11 billion ($9.84 billion) deal with Gillard`s government would be abandoned if the conservatives take power.

Telstra had agreed to hand over fixed-line assets to the government so they could be used as the backbone of Labor`s planned $38 billion national fiber-optic broadband network.

Three of the independents held a phone hook-up on Sunday to discuss forming a voting bloc with possibly two extra Green or green-minded MPs joining them in the lower house.

But they are a disparate group, standing for higher income and company taxes in the case of the Greens, to more open government, fewer banana imports, better state infrastructure for rural areas in the case of several independents.

BDST: 05:04 HRS, August 24, 2010