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By Jan Lopatka and Robert Muller
PRAGUE (Reuters) - The new Czech cabinet formed by allies of leftist President Milos Zeman lost a confidence vote on Wednesday in a split vote that made it likely the country will hold an early election before the end of the year, possibly as soon as October.
Zeman appointed his long-term supporter, economist Jiri Rusnok, in June, bypassing political parties that had proposed other options and accused Zeman of usurping powers that belong to parliament.
The government, which initially had no party support, gradually gained backing thanks to Zeman's influence over left-leaning factions and only narrowly lost the vote, 93 to 100.
Zeman, who won the country's first direct presidential election in January, said he would keep Rusnok in charge for at least several weeks. Rusnok said he would resign but will stay in a caretaker capacity until a new cabinet is formed or an election is held.
The center-right camp had argued that it had the right to form a government because it held a majority of parliamentary votes with 101.
But Wednesday's vote showed disunity in the faction after several of its deputies decided at the last minute to walk out and not participate in the vote. The conservative TOP09 party immediately joined earlier calls by the main leftist parties and Zeman to hold an early election.
"The parliamentary club of TOP09... decided that it will support early elections," the faction's chief Petr Gazdik said.
Markets have largely ignored the political standoff, as the country has kept its deficits under control, beating its self-imposed targets despite recession. Debt is at half the EU average and debt yields are by far the lowest in central Europe.
The crisis clouds the outlook for the 2014 budget, in which the past and current cabinets planned to ease cutbacks to help revive an economy that has been in recession since 2011.
Rusnok's government had already dismissed senior ministry officials and the heads of the state railways, one of the country's largest employers, steps that were strongly criticized across the political spectrum.
Rusnok and ministers have also said they would consider changes at supervisory boards of other state and semi-state companies, including electricity firm CEZ.
Opinion polls show that the center-left Social Democrats are likely to win early polls by a double-digit margin.
"Our estimate is that ... an election could be held in October this year," said Social Democrat leader Bohuslav Sobotka.
(Additional reporting by Jason Hovet; Editing by Sonya Hepinstall)