Out of war''s shadow, Sri Lankans vote for president

COLOMBO (Reuters) - Two former allies who led Sri Lanka to victory in a 25-year civil war dueled at the ballot box on Tuesday after a bitter campaign for the country''s first peacetime presidential vote in nearly three decades.

Fonseka has mounted a surprisingly strong challenge to President Mahinda Rajapaksa in a close contest in which the defeat of the Liberation Tigers of Tamil Eelam (LTTE) in May has figured heavily in campaigning, with both claiming credit.

Counting, starting with postal ballots, began on Tuesday, with the final result expected by midday on Wednesday. The earliest returns, just over 26,000 postal votes, showed Rajapaksa leading with 69 percent and Fonseka with about 30 percent, according to Election Commission results.

Late on Tuesday, the government said it had not yet decided whether to mount a legal challenge to Fonseka''s eligibility, Information Minister Anura Yapa said.

Fonseka called a media conference and admitted his name was not on voter rolls despite registering in 2008.

Rajapaksa as commander-in-chief and Fonseka as the army commander stood side-by-side after the historic victory in May, but within months split over what the general said was his sidelining by the president and false coup plot accusations.

More than 14 million people registered to vote and election monitors said turnout was between 70 and 80 percent. Heavy security included more than 68,000 police officers and fears voting day would be bloody did not materialize.

The Colombo Stock Exchange, open for a half-day trading session, rose 1.1 percent. It was one of the world''s best performing markets last year, gaining 125 percent on post-war optimism, and is at record levels this year.

Whoever wins will take the reins of a $40 billion economy awaiting the full peace dividend, despite large Indian and Chinese investments into infrastructure and about $1.5 billion in foreign investment into government securities.

Major investors have mostly shied away, saying Sri Lanka must first rein in government spending, which would in turn boost confidence in the rupee currency.

The rupee has been mainly stable in the past year but fell as much as 6 percent in April and May as cash reserves plunged.