The ruling coalition won some respite after Trinamool Congress overturned three decades of communist rule in West Bengal on Friday, but it suffered a huge loss in southern state of Tamil Nadu as graft scandals hit government support.

Prime Minister Manmohan Singh, dogged by the biggest corruption scandal in India's history, may gather some clout from the win, but he suffered the defeat of the DMK in Tamil Nadu after a telecoms kickback scandal. He also risks the rise of a fickle populist ally in West Bengal.

The complicated post election scenarios highlight how Singh faces hard times in his second term amid signs the 78-year-old is increasingly out of touch with both reform-hungry investors and voters furious at inaction over corruption and inflation.

In Tamil Nadu, the DMK and ruling Congress party ally were decimated. The party was linked to a $39 billion telecoms scam that paralysed Singh's government and hit foreign investment in Asia's third-largest economy.

Mamata Banerjee's win in West Bengal will be hailed as a victory for the Congress coalition, but the populist maverick who holds the balance of power in the national parliament will prove a thorn in the side of government economic reforms plans.

'Regional forces are again asserting their importance, and the Congress will have to make all kinds of bargains and compromises to fit them in,' said Ramachandra Guha, fellow of the Indian Institute of Management in Kolkata.

The main national opposition, the Bharatiya Janata Party, scarcely improved on its scant presence in either West Bengal or Tamil Nadu, a sign Congress is still the national party to beat ahead of a 2014 general election.

A MAVERICK POPULIST RISES

Banerjee, a 56-year-old who wears a traditional sari with bathroom slippers, lives alone with her mother and is the latest in a string of women in this traditional society, like Congress chief Sonia Gandhi, who have risen to political power.

Millions of Bengalis rebelled against a moribund state economy and a leftist government stuck in a Cold War time warp.

'The people of West Bengal have won their freedom today,' Banerjee said. 'The victory is of hapless people who have faced exploitation, violence, and discrimination.'

Jubilant supporters thronged outside Banerjee's house in the state capital Kolkata, punching the air, dancing and shouting her name and waving their tricolour party flags. They pasted green paint on their foreheads to mark the victory.

The final results, due in a few hours, may also define how aggressively the left-of-centre government moves ahead with long-awaited reforms such as raising fuel prices and a land acquisition bill for farmers and industry.

The BSE Sensex rose 2 percent, in part due to the election results.

'The election results will lead to some stability at the centre. It gives Congress more muscle to push through its reforms,' said R. K. Gupta, managing director of Taurus Mutual Fund.

The loss in Tamil Nadu may also be a silver lining for Congress, allowing Singh more leverage over a weakened ally.

The Congress coalition also won Assam and Kerala, but lost Pondicherry.

There is talk of a cabinet reshuffle in New Delhi after the election and a push by the government to pass bills in the July parliamentary session, including one to help industry acquire land from farmers.

With neither of the main national parties, Congress and BJP, able to secure majorities in general elections, electoral power in India comes down to forging coalitions with regional allies, who often have chequered records.

The results will take the political temperature in states that jointly make up a fifth of the 545-strong lower house of parliament and will help redraw the political map ahead of federal elections in 2014.

India's 28 states, with strong linguistic and cultural identities, have a high degree of autonomy and their leaders are some of the most important powerbrokers in India, often blocking policies by the federal government.

West Bengal sends 42 lawmakers to parliament and its long domination by the communists is one of the biggest reasons India's founding socialist ideas retain political currency even after two decades of market reforms.

Banerjee's Trinamool party in West Bengal is the biggest coalition ally of Congress and holds the balance of power in parliament. Her victory may force the government to be more dependent on an unpredictable partner opposed to several key economic reforms.

Analysts say Banerjee's victory will give her a louder voice when the government mulls raising fuel prices or cutting down subsidies -- measures that are key to keeping the fiscal deficit at the targeted 4.6 percent of GDP in 2011/12, when slowing economic growth may see a sluggish tax intake.

As the railway minister, Banerjee has kept fares untouched and expanded freebies. She has several times forced a deferral of decisions on raising fuel prices. Her party is also against more foreign investment in insurance.

In Tamil Nadu, the regional DMK party facing a series of arrests over a telecoms scam is the second biggest coalition ally and Singh may be forced to switch allegiance to the likely winner, the regional AIADMK party nearer to the 2014 election.

Singh's government has been considering lifting controls on diesel and fertiliser prices and streamlining a bloated food subsidy programme, but these measures are politically unpalatable given inflation is at nearly 9 percent.

Rising tax revenue from an economy powering away at close to 9 percent has long let India avoid taking hard decisions on slashing expenditure, including subsidies on food, fuel and fertilisers that supporters say are needed to protect India's half-a-billion mostly rural poor from inflation.

But growth this year is expected to slow down to 8.5 percent, weighed down by the nine rate hikes since last March effected to curb inflation.