(Reuters) - Secularist challenger Iyad Allawi's coalition won the most seats in Iraq's election, according to preliminary results on Friday, but the tight race foreshadowed long, divisive talks to form a new government.

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The cross-sectarian Iraqiya bloc headed by former prime minister Allawi took 91 seats with the State of Law coalition led by Shi'ite Prime Minister Maliki close behind with 89 seats, a result that highlighted Iraq's sectarian gulf following a vote Iraqis hoped would stabilize their country after years of war.

Nearly three weeks after the March 7 ballot, the final preliminary results showed Maliki taking ethnically and religiously diverse Baghdad and predominantly Shi'ite southern provinces, while Allawi dominated largely Sunni northern and western regions.

The results showed the Iraqi National Alliance (INA), a Shi'ite bloc with close ties to Iran, in third place with 70 seats. The INA, an alliance which includes anti-American cleric Moqtada al-Sadr, is negotiating a merger with Maliki's State of Law, officials from both blocs have said.

Maliki said after the results were released that he was on the way to forming the biggest bloc in parliament.

But any attempt to sideline Allawi in what could be weeks or months of perilous negotiations to form a new government could be taken as a slight by Sunnis shunted to the political wilderness when Iraq's majority Shi'ites rose to power following the 2003 U.S.-led invasion that ousted Saddam Hussein.

SADR THE KINGMAKER?

Maliki said he believed the results were not final.

"For sure, we will not accept these results," Maliki told a news conference.

The results released on Friday represented a 100 percent preliminary count of the votes, but the final results, which have to be certified by a court, could take weeks.

The potential power vacuum and likely instability during the coalition negotiations will be watched closely by Washington as the U.S. military prepares to formally end combat operations by September 1 and pull its troops out by the end of 2011, and also by global oil firms that inked multibillion-dollar contracts to refurbish Iraq's rich but dilapidated oilfields.

Underscoring Iraq's fragile security and the tensions caused by the March 7 election, two explosions in the town of Khalis, in Iraq's mainly Sunni northern Diyala province, killed at least 42 people and wounded 65 just before the release of the results.

Sectarian violence exploded as politicians took more than five months to agree a government after the last parliamentary vote in 2005.

The Sadrists' strong election showing gives the Shi'ite cleric, whose Mehdi Army fiercely fought U.S. troops, a potential kingmaker role in the new parliament. A merger of State of Law and INA would take the two blocs close to the 163 seats needed to form a government.

Such an alliance could leave Sunnis vulnerable after they turned out in force at the polls. Their participation was considered a key to Iraq's future stability after the sectarian bloodshed that engulfed the country in 2006-07.

Sunni insurgents are blamed for daily bombings and other attacks despite a significant drop in overall violence during the last two years.

A merger could also leave Maliki exposed in his quest for a second term as prime minister. The Sadrists were infuriated when Maliki sent federal troops to crush their militias and authorities still hold hundreds of Sadrist prisoners.

(Additional reporting by Rania El Gamal, Muhanad Mohammed, Aseel Kami and Ian Simpson; Writing by Jim Loney; Editing Jon Hemming)

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