PENDANG, Malaysia (Reuters) - Prime Minister Mahathir Mohamad's ruling alliance showed signs of turning the Islamic tide in northern Malaysia, snatching one by-election victory on Thursday and only narrowly losing a second.
After taking heavy hits in a 1999 vote coloured by the sacking and jailing of his former deputy Anwar Ibrahim, the Barisan Nasional's showing in his home state of Kedah was sweet for Mahathir, who in June decided to retire late next year.
"This shows Malaysia is a truly democratic country, where we can win one seat but lose another," he said on state television. Mahathir, among Asia's longest serving leaders, has been in power for 21 years.
Analysts said the results would likely encourage investors.
Both seats, one for parliament and one for the Kedah state legislature, fell open after Fadzil Noor, leader of the Parti Islam se-Malaysia (PAS), died last month.
Led by Muslim preachers, the conservative PAS dreams of turning multi-racial Malaysia into an Islamic state although only just over half of its 23 million people follow the faith.
The Islamic party has made a mission of trying to impose the religion's strict traditional laws, which prescribe punishments like stoning and amputation for adulterers and thieves.
PAS made heavy inroads in the Muslim Malay dominated north three years ago and won two of Malaysia's 13 states, though it could not erase the BN's two-thirds parliamentary majority.
Despite an expected sympathy vote after Fadzil's death PAS was unable to stop a swing in favour of the government side.
In the Anak Bukit state seat the PAS majority was cut to 508 from its 1,840 edge in 1999.
In the bigger Pendang constituency the BN overturned a 2,939 PAS majority to win by just 283 votes after a recount.
In Pendang a crowd of more than a thousand PAS supporters dispersed quietly, watched by riot police and a water cannon, after hearing the result outside the election headquarters.
"The market should react quite positively given that there was a significant swing to the Barisan," said P.K. Basu, regional economist at Credit Suisse First Boston in Singapore.
"That the Barisan has wrested that seat suggests that the immoderate direction that PAS has taken since September 11 has not given it any additional ground."
The hardline Islamic party's image suffered after the attacks as police began locking up suspected militants, among them PAS supporters accused of belonging to a group harbouring ambitions to set up a single Islamic state in Muslim dominated parts of Southeast Asia.
The turnout was a huge 84 percent in Anak Bukit and 76 percent in Pendang after a bitter campaign in which Mahathir, a Muslim who met Pope John Paul in Rome last month, was depicted in PAS posters wearing a Roman Catholic priest's robes.
"If we work hard, if we understand our religion and reduce fanaticism, I am sure eventually PAS members will join UMNO," said Mahathir, seen as a strong moderate Muslim voice in the wake of the September 11 attacks on the United States.
The Anwar issue has faded. The former deputy prime minister is serving 15 years for sex and abuse of power convictions he says were cooked up after he challenged Mahathir in 1998.
The main issues PAS campaigned on were a government plan to teach mathematics and science in English, and its own drive to introduce the Islamic hudud penal code.
The new PAS leader, Abdul Hadi Awang, a preacher known for his dogma and firebrand statements, champions the hudud.
The northeast state of Terengganu, where Hadi is chief minister, passed the laws two weeks ago, but Mahathir's government will probably never let them be used.
The next general election is not expected until after Mahathir steps down in late 2003.