By Guy Faulconbridge and Kate Holton
LONDON (Reuters) - British Prime Minister David Cameron won a stunning election victory on Friday, confounding forecasts that the vote would be the closest in decades and winning a clear majority that left his Labour opponents in tatters.
The sterling currency, bonds and shares surged on a result that reversed near-universal expectations of an inconclusive "hung parliament", in which Cameron would have had to jockey for power with Labour rival Ed Miliband.
Instead, Cameron met Queen Elizabeth at Buckingham Palace to accept a mandate to form the first majority Conservative government since John Major's surprise victory in 1992.
Despite the unexpectedly decisive outcome, longer-term uncertainty looms over whether Britain will stay in the European Union - and even hold together as a country. Secessionists swept the board in Scotland, and Cameron repeated a promise to hold a referendum on membership in the EU.
The scale of Cameron's victory surpassed even his party's most optimistic projections.
"This is the sweetest victory of all," Cameron told enthusiastic supporters at party headquarters. "The real reason to celebrate tonight, the real reason to be proud, the real reason to be excited is we are going to get the opportunity to serve our country again."
Smiling beside his wife Samantha, Cameron returned to the prime minister's office in Downing Street after meeting the Queen. Downing Street staff lined up to applaud when he entered the residence.
Cameron's pitch to voters was that he had rescued Britain from economic crisis to deliver the fastest growth among major economies. He had warned that Labour's Miliband would cripple the United Kingdom by giving Scottish nationalists the keys to England's treasure.
In early appointments to his cabinet, he retained George Osborne as finance minister, sticking with the man credited with overseeing recovery from the economic crash.
Miliband, a self-confessed socialist "geek", had argued that the recovery was benefiting the rich and most people were still worse off. But he failed to connect with working class voters or convince the public he could be trusted with the world's fifth largest economy. He phoned Cameron to concede and then resigned as party leader.
With all results declared in the 650-seat house, the Conservatives held 331 and Labour 232. The centre-left Liberal Democrats, who supported Cameron in government since 2010, were all but wiped out, reduced to eight seats from 57.
Scottish nationalists won 56 of the 59 Scottish seats, up from just six five years ago.
The anti-EU, populist UK Independence Party (UKIP) surged into third place in the overall vote tally, but disappointed its followers by managing to place first in only one district to win just a single seat. Like Labour's Miliband, Lib-Dem leader Nick Clegg and UKIP leader Nigel Farage resigned as party leaders.
Sterling gained more than 2 cents against the dollar
The FTSE 100 stock index (FTSE) was up 1.45 percent at 6985, approaching a record high set last month. The price of British government bonds also rose.
"DISUNITED KINGDOM"?
Cameron's victory means Britain will face a vote which he has promised on continued membership in the EU. He says he wants to stay in the bloc, but only if he can renegotiate Britain's relationship with Brussels.
Jean-Claude Juncker, president of the EU's executive European Commission, congratulated Cameron on his victory. The Commission would examine any British proposal "in a polite, friendly and objective way," a Commission spokesman said.
In Scotland, the extraordinary scale of the nationalist landslide victory reopened the question of the future of the United Kingdom less than a year after Scots voted in a referendum to remain inside it.
Scotland will send just three representatives of traditional British parties to the UK parliament in London and its dominant nationalists will be locked out of the British cabinet, arguments separatists could use to seek a new vote to leave.
Cameron sounded a conciliatory note toward Scotland, likely to be his first immediate headache, promising further devolution of powers to a Scottish government.
"In Scotland, our plans are to create the strongest devolved government anywhere in the world with important powers over taxation and no constitutional settlement will be complete if it did not offer also fairness to England," Cameron, 48, said.
Alex Salmond, the former leader of the Scottish nationalists, now elected to represent them in parliament in London, called the SNP's victory an "electoral tsunami on a gigantic scale."
"The SNP are going to be impossible to ignore and very difficult to stop."
The United Kingdom includes England, Scotland, Northern Ireland and Wales, with England accounting for 85 percent of the population. Scottish politicians elected to parliament in London have historically held major cabinet posts, which could now be impossible with nearly all Scottish seats in nationalist hands.
In a body blow to Labour that set the pattern for the night, Douglas Alexander, the party's campaign chief and foreign policy spokesman, lost his seat to a 20-year-old Scottish nationalist student, the youngest member of the House of Commons since 1667.
Labour also faced traumatic losses in England. Ed Balls, in line to be finance minister if Labour had won, lost his seat. He fought back tears as he expressed sorrow at Labour's defeat.
"Any personal disappointment I have at this result is as nothing compared to the sense of sorrow I have at the result that Labour have achieved across the UK tonight ... and the sense of concern I have about the future," he said.
Miliband, an Oxford-educated son of a Marxist intellectual, never quite connected with working-class voters or cast off Labour's reputation for profligacy. He ran a campaign widely seen as better than expected, but was always far behind Cameron in polls asking voters who they saw as a more credible leader.
"Britain needs a Labour party that can rebuild after this defeat so we can have a government that stands up for working people again," he said as he announced his resignation. "Now it's time for someone else to take forward the leadership of this party."
The Liberal Democrats were punished for Clegg's decision to join Cameron in government five years ago, which meant abandoning campaign pledges and which party members considered treachery. Two thirds of the party's voters deserted it.
"It is simply heartbreaking," Clegg said of the losses. "Clearly the results have been immeasurably more crushing and unkind than I could ever have feared."
UKIP's surge into third place in the overall vote tally mirrored the rise of similar populist, anti-immigrant groups elsewhere in Europe.
It racked up dozens of second place finishes across the country, picking up votes from both Labour and the Conservative, but it failed to yield a strong presence in parliament under Britain's system in which candidates must place first in districts to win seats.
Its leader Farage, a charismatic former commodities trader credited with making a fringe party into a major force, resigned over his failure to win a seat for himself, but said he might seek the party leadership again later this year.
One other loser is the opinion polling industry which is likely to face an inquest over its failure to predict the outcome. Before the election, virtually all opinion polls had shown the Conservatives and Labour neck-and-neck.