By Prak Chan Thul
PHNOM PENH (Reuters) - Cambodia's long-ruling Prime Minister Hun Sen faced his biggest political setback in two decades on Monday as the country's opposition rejected an election result as tainted by widespread fraud, despite heavy losses for the ruling party.
Opposition leader Sam Rainsy, buoyed by a near doubling of seats in parliament, called for an inquiry into what he called massive manipulation of electoral rolls in Sunday's vote.
The government announced late on Sunday that Hun Sen's Cambodian People's Party (CPP) had won 68 seats in the 123-seat parliament to the opposition's 55, a loss of 22 seats for the ruling party.
That marked the 60-year-old Hun Sen's worst election result since the war-torn country returned to full democracy in 1998, although the CPP retained a governing majority to enable the prime minister to extend his 28-year rule.
Prolonged wrangling over the result and a weakened Hun Sen could raise policy uncertainty in the small but fast-growing Southeast Asian nation that is drawing growing investor interest and has forged strong economic ties with China and Vietnam.
But the opposition's chances of overturning the outcome are slim given the ruling party's grip on the courts and with major foreign donors like the United States unlikely to reject the result without evidence of massive fraud.
The Cambodia National Rescue Party (CNRP), whose campaign was given a boost by the return from exile of leader Sam Rainsy, said it wanted an investigation committee set up with representatives from political parties, the United Nations, the election authority and non-governmental organizations.
"There were 1.2 million to 1.3 million people whose names were missing and could not vote. They deleted our rights to vote, how could we recognize this election?" Sam Rainsy, a French-educated former finance minister, told a news conference.
"There were ghost names, names only on paper."
The opposition tapped into growing concern among Cambodians over rising inequality and entrenched corruption that Hun Sen's critics say his policies have exacerbated.
Hun Sen, who has yet to speak publicly about the outcome, may have to adjust some policies in light of the surge in opposition support and show more sensitivity to public opinion. The loss of its two-thirds majority means the CPP will need opposition support to enact any changes in the constitution.
But Hun Sen still has the ability to control policymaking through his majority and the entrenched networks of political influence he has built within the CPP.
"It's definitely unprecedented and unexpected but for now I don't think regime stability is at stake," said Giulia Zino, a Southeast Asia analyst at Control Risks group in Singapore.
The CPP had 90 seats in the outgoing parliament and the parties that united to form the CNRP had 29, with minor parties holding the remaining four. Cambodia's election commission has yet to announce how many seats each party has won, and will not announce full, official results until August 15 at the earliest.
Rights groups have criticized the electoral system as heavily biased in favor of the ruling party. The European Union declined to deploy poll monitors for this election after Cambodia did not act on its previous recommendations.
The Transparency International group, which helped monitor the election, cited various irregularities in the vote and said in a statement it was "very concerned about the disenfranchisement of citizens and suspect voters".
Voting on Sunday, like the campaign itself, was for the most part peaceful.
The CPP, backed by a compliant domestic media and superior resources, had been confident of victory. Analysts had predicted a reduction in its majority after the merger of two main opposition parties, as well as the return of Sam Rainsy, but the extent of opposition gains was a surprise.
Rising garment exports plus heavy flows of aid and investment from China have fuelled rapid economic growth, but that has been accompanied by a rise in social tension.
Cambodians have protested more frequently over poor conditions in the garment industry and land rights in the country of 14 million, where a third of people live on less than 65 U.S. cents per day.
The urban population has swelled in recent years, giving rise to a new generation of young voters who have access to wider sources of information online and who tend to support the opposition.
"Democracy is stronger in Cambodia than most outsiders anticipated," said Douglas Clayton, the chief executive of the Leopard Capital investment fund in Phnom Penh.
"The government will likely become more consultative and sensitive to public opinion."
The United Nations organized an election in 1993 that put Cambodia on a rocky path towards stability after decades of turmoil that included the 1975-79 "Killing Fields" rule of the communist Khmer Rouge.
Hun Sen, a former junior commander in the Khmer Rouge who broke away during their rule, lost that election but refused to accept the result and negotiated a position as joint prime minister before seizing power in a coup in 1997.
(Writing by Alan Raybould and Stuart Grudgings; Editing by Robert Birsel)