Portugal's President Anibal Cavaco Silva on Sunday ruled out a snap election and said he wanted the center-right coalition government to stay in place to keep an international bailout on track. Political turmoil had threatened to derail Portugal's planned exit from the EU/IMF bailout in mid-2014, especially after "national salvation" talks between the two coalition parties and the opposition Socialists collapsed on Friday.
Lisbon has already been forced to request a delay in the eighth review of the bailout by its creditors, originally scheduled to start last Monday, until the end of August or early September.
"As the national salvation compromise was impossible to achieve, I consider that the best alternative solution is for the present government to remain in its functions, with reinforced guarantees of cohesion and solidity of the coalition, until the end of its term (in 2015)," the president said.
As president, Cavaco Silva has the right to seek to dissolve parliament and call early elections if he believes the government has lost its ability to govern.
But an internal rift within the coalition that triggered the crisis appears to have been resolved, and the government, which has a solid majority in parliament, last week easily defeated a no-confidence motion.
In his televised address, Cavaco Silva said the coalition presented him "guarantees of a solid understanding" on how to successfully complete the bailout program and allow Portugal to return to full market financing.
"I think it's a positive decision to calm down investors that removes uncertainty and maintains the drive of meeting the bailout goals," said Rui Barbara, an economist at Banco Carregosa.
(Read more: Portugal ruling party vows to meet bailout goals)
"In the eyes of investors, Portugal should return to the situation before the political crisis."
The yield on Portugal's benchmark 10-year bonds spiked to nearly 8 percent earlier this month over the crisis from three-year lows of 5.2 percent in May, but retreated last week on hopes of a solution.
Still, analysts warned that Lisbon's ability to implement tough austerity measures needed to meet the bailout goals may now be more limited. The 78-billion-euro ($102.5-billion) bailout program and accompanying austerity policies are associated with the worst recession in Portugal since the 1970s.
"It's good news for the markets, but everyone gets out weakened from this crisis," said Filipe Garcia, head of Informacao de Mercados Financeiros consultants in Porto.