By Igor Ilic

ZAGREB (Reuters) - Croatia was preparing for tense coalition talks on Monday after weekend elections put the conservatives unexpectedly ahead, but short of the seats needed to form a government.

A surge in support for leftist populists saw the Social Democrats, who were widely expected to come out with the largest number of seats, lose ground in a poll where the turnout was a fifth lower than in the last one just 10 months ago.

This reflected popular anger at politicians who are seen to have exploited nationalist rhetoric rather than tackle the country's economic woes, with the populist left Zivi Zid (Human Shield) alliance rising from one to eight seats on promises to be tough on banks and corrupt politicians.

Most opinion polls had suggested the Social Democrats would win around 60 seats, and the Croatian Democratic Union (HDZ) would be behind. This was actually the reverse in the election.

Led by former diplomat Andrej Plenkovic, the HDZ won 61 seats in Zagreb's 151-seat parliament and will now need to move quickly to avoid further anger from a disillusioned public.

Unemployment is at 13 percent and European Union authorities are urging Croatia to address public debts that eat up 3.5 percent of economic output in interest payments alone.

Plenkovic helped the HDZ win back ground it lost to rivals after its previous government collapsed in June after only five months in power amid rows over political appointments with its coalition partner. The HDZ beat the Social Democrat-led alliance, which won 54 seats.

"We are the party that will have the privilege of forming a stable government," Plenkovic said as he claimed victory early on Monday.

SDP leader Zoran Milanovic, a former Prime Minister, said he would not stand as leader in the next party election which will take place in the coming months, but did not resign with immediate effect as some had expected after the result.

Plenkovic's more moderate tone might make for a more stable coalition, although the Most ("Bridge") party, the likely kingmaker with 13 seats, showed little sign of compromising.

Among Most's initial demands were changes to the financing of political parties, lower taxes for businesses and an Adriatic economic zone - a bold proposal that would likely require extensive consultation with Croatia's European Union partners.

"The SDP is realistically too far behind to be in the race to form a future cabinet and if Plenkovic manages to establish a reasonably good cooperation with Most, the government could be stable," said political analyst Ivan Rimac.

But any government will struggle to deliver reforms being urged by the EU, which is monitoring Croatia's debt-burdened economy and an investment environment it sees as business-unfriendly.

"(HDZ) would need to strike an agreement with a diminished Most and at least one more small party," said Otilia Dhand, an analyst at risk consultancy Teneo, highlighting the risk that the new cabinet could be as fractious as the old one.

(Editing by Thomas Escritt and Alexander Smith)