UPDATE 10-Japan's LDP surges back to power, eyes two-thirds majority with ally
* Hawkish ex-PM Abe set to return to power
* Abe seeks radical monetary easing, big spending for economy
* LDP likely to stay pro-nuclear despite Fukushima crisis
* Voters ditch DPJ in disappointment over its three-year rule
* LDP, partner New Komeito, to form coalition - LDP official
(Updates with projections based on vote count)
TOKYO, Dec 16 (Reuters) - Japan's conservative Liberal Democratic Party (LDP) surged back to power in an election on Sunday just three years after a devastating defeat, giving ex-Prime Minister Shinzo Abe a chance to push his hawkish security agenda and radical economic recipe.
An LDP win will usher in a government committed to a tough stance in a territorial row with China, a pro-nuclear energy policy despite last year's Fukushima disaster and a potentially risky prescription for hyper-easy monetary policy and big fiscal spending to beat deflation and tame a strong yen.
A TV Asahi projection based on counted votes gave the LDP at least 291 seats in parliament's 480-member lower house, and together with its small ally, the New Komeito party, a two-thirds majority needed to override, on most matters, the upper house, where no party has majority.
That would help break a policy deadlock that has plagued the world's third-biggest economy since 2007.
"We have promised to pull Japan out of deflation and correct a strong yen," Abe said on live television. "We need to do this. The same goes for national security and diplomacy."
Parliament is expected to vote Abe in as prime minister on Dec. 26.
Analysts said that while markets had already pushed the yen lower and share prices higher in anticipation of an LDP victory, stocks could rise and the yen weaken further in response to "super majority."
While LDP and New Komeito officials confirmed they would form a coalition, LDP Secretary-General Shigeru Ishiba did not rule out cooperation with the Japan Restoration Party, a new right-leaning party that was set to pick up at least 52 seats.
"I think there is room to do this in the area of national defense," he said. The New Komeito is more moderate than the LDP on security issues.
Projections showed Prime Minister Yoshihiko Noda's Democratic Party of Japan winning at least 56 seats, less than a fifth of its tally in 2009. Noda said he was stepping down as party leader after the defeat, in which several party heavyweights lost their seats.
The Democrats swept to power in 2009 promising to pay more heed to consumers and break up the "iron triangle" of the powerful bureaucracy, business and politicians formed during more than half a century of almost unbroken LDP rule.
Many voters had said the DPJ failed to meet election pledges as it struggled to govern and cope with last year's huge earthquake, tsunami and nuclear disaster, and pushed through an unpopular sales tax increase with LDP help.
Voter distaste for both major parties has spawned a clutch of new parties including the Japan Restoration Party, founded by popular Osaka Mayor Toru Hashimoto.
LDP leader Abe, 58, who quit as premier in 2007 citing ill health after a troubled year in office, has been talking tough in a row with China over uninhabited isles in the East China Sea, although some experts and party insiders say he may temper his hard line with pragmatism once in office.
"The Senkaku islands are inherently Japanese territory," Abe said, referring to the islands that China calls the Diaoyu. "I want to show my strong determination to prevent this from changing."
But he also said he had no intention of worsening relations with China.
The soft-spoken grandson of a prime minister, who would become Japan's seventh premier in six years, Abe also wants to loosen the limits of a 1947 pacifist constitution on the military, so Japan can play a bigger global security role.
China's official Xinhua news agency, noting the deterioration in relations with Japan, warned it not to strain ties further.
"An economically weak and politically angry Japan will not only hurt the country, but also hurt the region and the world at large," Xinhua said. "Japan, which brought great harm and devastation to other Asian countries in World War Two, will raise further suspicions among its neighbors if the current political trend of turning right is not stopped in time."
"UNLIMITED" MONETARY EASING
The LDP, which promoted nuclear energy during its decades-long reign, is expected to be friendly to power utilities, although public safety concerns remain a barrier to business-as-usual for the industry.
Abe has called for "unlimited" monetary easing and big spending on public works to rescue the economy from its fourth recession since 2000. Such policies, a centerpiece of the LDP's platform for decades, have been criticized by many as wasteful pork-barrel politics.
Kyodo news agency said the new government could draft an extra budget for 2012/13 worth up to 10 trillion yen ($120 billion) and issue debt to pay for it.
Many economists say that prescription for "Abenomics" could create temporary growth and allow the government to go ahead with a planned initial sales tax rise in 2014 to help curb a public debt now more than twice the size of Japan's economy.
But it looks unlikely to cure deeper ills or bring lasting growth, and risks triggering a market backlash if investors decide Japan has lost control of its finances.
"Japan can't spend on public works forever and the Bank of Japan's monetary easing won't keep the yen weak for too long," said Koichi Haji, chief economist at NLI Research Institute. "The key is whether Abe can implement long-term structural reforms and growth strategies."
Japan's economy has been stuck in the doldrums for decades, its population ageing fast and flagship companies such as Sony Corp struggling with foreign rivals and burdened with a strong yen, making "Japan Inc" a synonym for decline. ($1 = 83.5000 Japanese yen)
(Additional reporting by Chikafumi Hodo, Yoko Kubota, Kiyoshi Takenaka, Leika Kihara and Mari Saito in TOKYO, Yoshiyuki Osada in OSAKA and Sui-Lee Wee in BEIJING; Editing by Tomasz Janowski and Robert Birsel)