By Jonathan Barrett
SYDNEY (Reuters) - Embattled Australian Prime Minister Malcolm Turnbull appeared likely to retain power after gaining the support of a key independent on Thursday, although the closeness of the vote signaled more tough political and economic times ahead.
There were signs that the political instability after Saturday's cliffhanger election was beginning to take its toll on the Australian economy, with Standard and Poor's cutting Australia's credit rating outlook to negative from stable, threatening a downgrade of its coveted triple A status.
Turnbull flew to northern Queensland state to win reluctant support from Bob Katter, a maverick former member of the ruling conservative coalition who is now a potential kingmaker if Turnbull is unable to win the 76 lower house seats needed to form government outright.
"Today we are announcing our support ... for a Turnbull government. I do so with no great enthusiasm," Katter told reporters. "I will maintain my right to change at any point of time in the future."
Katter's support gives Turnbull's coalition a total of 74 seats, according to the latest Australian Broadcasting Corp. projections, as vote counting continues.
Labor is projected to win 66 seats, meaning they would need to win the six seats still being counted and do deals with all the four remaining independents to form government - a scenario considered extremely unlikely by pollsters.
"I remain confident that we will form a government, and we will unite the parliament as far as we are able to," Turnbull told reporters after meeting Katter.
"We will unite the nation in a common purpose to continue to ensure that we have strong economic growth," he said.
Turnbull, however, will realistically only scrape through with the slimmest of margins and faces an even more hostile upper house Senate, making it difficult for him to pass planned economic reforms.
That point was rammed home by Labor leader Bill Shorten, who acknowledged the coalition would most likely win, but "with a diminished authority, diminished mandate and a very divided political party".
"If Mr Turnbull is dragged across the line narrowly his problems and Australia's are only just beginning," Shorten told reporters in the western city of Perth.
The Australia dollar fell half a U.S. cent after S&P's announcement, which cited concerns the coalition government would be hampered in its plans to return to budget surplus as it struggles to form a majority government.
"I think what the Australian people want to be assured of today is that there is a clear plan, should we be able to form government, to maintain the fiscal health of this country and that is what the agencies are saying is necessary," Treasurer Scott Morrison told reporters soon after the S&P announcement.
Turnbull's gamble in calling an election, ostensibly to clear the upper house Senate of what he saw as obstructive minor parties, backfired badly with a much bigger swing to the center-left Labor opposition than expected.
It also saw minor parties and independents become even more powerful, making it less likely Turnbull will be able to push his reformist economic agenda, which includes a A$50 billion ($37.6 billion) corporate tax break over 10 years, through an intransigent upper house.
That places Katter and centrist Nick Xenaphon as potential kingmakers with team members in both houses. Two other lower house independents, Andrew Wilkie and Cathy McGowan, have ruled out any deals with the government.
(Editing by Jane Wardell and Paul Tait)