UPDATE 1-Sri Lanka army success stirs renewed election talk

By C. Bryson Hull

COLOMBO, Nov 17 (Reuters) - Allies of Sri Lanka's president called for new elections on Monday after a decisive weekend military victory fuelled renewed talk he will call early parliamentary polls to strengthen his hand.

The military took control of the entire western coast on Saturday for the first time since 1993 after driving Liberation Tigers of Tamil Eelam (LTTE) rebels from the strategically valuable Pooneryn area near the northern Jaffna Peninsula.

And on Monday, the newly fielded Task Force III army unit captured Mankulam, at the junction of two roads leading to the last large towns under LTTE control, their self-declared capital of Kilinochchi in the north and the eastern Mullaitivu port.

Saturday's seizure of the west coast was announced after months of heavy fighting and coincided with the second parliament reading of President Mahinda Rajapaksa's populist-leaning budget.

It passed convincingly despite heavy criticism of its cost by the main opposition United National Party (UNP), which has increasingly blasted Rajapaksa's handling of the economy. Rajapaksa is half-way through a six-year term.

Minister of Mass Media and Information Lakshman Yapa Abeywardene said on Monday the government should call for a vote, echoing comments by other allies in Rajapaksa's ruling United People's Freedom Alliance coalition since Pooneryn fell.

"We are confident of winning it. By holding it at this time, we can see the opinion of the public on the government's war effort and also can get a clear mandate," he told Reuters.

Since Saturday, soldiers have been pushing forward on several fronts and are heading for a showdown at Kilinochchi, where the separatist LTTE has set up what it calls the capital of the state it wants to create for Sri Lanka's minority ethnic Tamils.

Keeping people guessing over a new election has long been one of the great political games on the Indian Ocean island nation. Previous presidents have used their power to call provincial and parliamentary elections to great effect.

A top ally of the president said discussions over when to hold the vote had heightened since Pooneryn fell.

"It seems to have had a favourable impact overall, and of course governments will use favourable situations to their advantage, especially with other challenges arising," said the official, speaking on condition of anonymity.

The official cautioned that there were three provincial elections due before April and that those might happen first.

WAR VS ECONOMY

Though the war is going well, Sri Lanka's $32 billion economy is struggling.

The effects of the global economic crisis have begun to reach the island nation, sharply cutting forecasts for two top exports, tea and textiles, and raising even further the cost of foreign borrowing on which Sri Lanka relies.

Foreign exchange reserves have fallen by at least a quarter since September as the central bank has defended the rupee against depreciation. The central bank said last week Sri Lanka would record a balance of payments deficit this year.

The IMF has warned it to cut reliance on expensive foreign debt, let the rupee float and trim expenditure or else risk what it called some of South Asia's most impressive growth -- which is expected to cool to near 6 percent from 6.8 percent last year.

One Colombo-based financial analyst, who declined to be named, said now would be an ideal time for Rajapaksa's government to ask voters for another term to finish the war after delivering the best battlefield successes so far in the 25-year conflict.

Many Sri Lankans fault the UNP for failing to defeat the LTTE during 20 years in power since the war began in 1983. If the war ends, focus will turn back to the economy, the analyst said.

"And then people will turn to the UNP to drive the economy, which is heavily hit by the war. People still believe the government is best for the war and the UNP is best to revive the economy," the analyst said.

(For a SCENARIOS factbox double click on

(Additional reporting by Ranga Sirilal and Shihar Aneez; Editing by Paul Tait and Jerry Norton) Keywords: SRILANKA WAR/

(bryson.hull@reuters.com; +94-11-237-5903; Reuters Messaging; bryson.hull.reuters.com@reuters.net)

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