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By Richard Balmforth and Timothy Heritage KIEV (Reuters) - Pro-Western parties will dominate Ukraine's parliament after an election handed President Petro Poroshenko a mandate to end a separatist conflict and to steer the country further away from Russia's orbit towards mainstream Europe. U.S. President Barack Obama hailed Sunday's election as "an important milestone in Ukraine's democratic development" while top European Union officials said on Monday it represented a "victory of the people of Ukraine and of democracy". But, reflecting the geopolitical struggle between Moscow and the West over Ukraine's future, Russia's foreign minister reacted cautiously, saying Moscow expected Poroshenko to form a government that would heal the "split" in Ukrainian society. Poroshenko began power-sharing talks with Prime Minister Arseny Yatseniuk after their political groups led other pro-Western forces committed to democratic reforms in sweeping pro-Russian forces out of parliament. "The main task is to quickly form a pro-European coalition for carrying out agreements with the EU," Yatseniuk said at a meeting with election observers. International observers from the Organization for Security and Cooperation in Europe gave a further lift to the pro-Western Kiev leadership, saying Sunday's election had "largely upheld democratic commitments" despite the conflict in the east. It was "an amply contested election that offered voters real choice and (had) a general respect for fundamental freedoms," Kent Harstedt, OSCE special coordinator, told a news conference. After months of conflict and turmoil there was no euphoria from Poroshenko's allies. He faces huge problems: Russia opposes his plans to one day join the European Union, a ceasefire is barely holding between government forces and pro-Russian separatists in the east, and the economy is in dire straits. Russian President Vladimir Putin can also still influence events, as the main backer of the rebels in the east and through Moscow's role as natural gas supplier to Ukraine and the EU. He could also remove trade concessions from Kiev if it looks West. But Poroshenko's immediate task is to cement an alliance with Yatseniuk's People's Front, running neck and neck with his bloc on about 21 percent support after more than two-thirds of the votes on party lists were counted. To secure a majority they are likely to turn to Samopomich (Selfhelp), a like-minded party with 11 percent of votes, whose leader Poroshenko also met on Monday. Final results for party list voting and in single constituency seats are due on Oct. 30. The tandem between the 49-year-old confectionery magnate Poroshenko and the professorial Yatseniuk, who has gone out ahead as an anti-Russian hawk in recent weeks, was emerging as a relationship likely to dominate the new political scene. Yatseniuk once called the prime minister's job "political suicide" but, a favorite in the West, he could now keep the job to oversee deep and possibly unpopular reforms. RETURN OF NORMALCY Poroshenko and his allies are trying to restore normalcy to the sprawling country of 46 million and draw a line under a year of upheaval that began with street demonstrations against Poroshenko's pro-Russian predecessor, Viktor Yanukovich. Yanukovich was overthrown in February in what Russia called a "fascist coup" after he spurned a deal that would have deepened ties with the EU. Moscow responded by swiftly seizing and annexing the Crimea peninsula and backing the separatist rebellions in which more than 3,700 people have been killed. Moscow has also halted gas supplies to Ukraine in a row over the price and unpaid bills, causing alarm in the EU which gets a third of its gas needs from Russia, half of this via Ukraine. Obama, in a statement, said the United States looked forward to the quick formation "of a strong, inclusive government" in Kiev and expressed support for Ukraine's territorial integrity including the return of Crimea. European Commission President Jose Manuel Barroso and European Council chief Herman Van Rompuy, in a joint statement, said they expected the Kiev leadership now to seek a "broad national consensus" to intensify much-needed reforms. Russian Foreign Minister Sergei Lavrov, in a more downbeat reaction, said Moscow hoped for the formation of a "constructive government" to would solve social-economic problems, fulfill the terms of peace talks and "not preserve the split in society". The Kiev government says it is hoping for modest economic growth next year after a 6 percent decline in 2014, but the World Bank expects the economy to continue shrinking. In line with measures agreed with the IMF, Yatseniuk's government has cut budget expenditure and let the Ukrainian hryvnia float. The currency has lost about 40 percent of its value against the dollar since the start of the year. The economic decline has been aggravated by the fighting in the east, where two more Ukrainian soldiers were killed on Sunday and shelling resumed on the edge of the rebel stronghold of Donetsk on Monday despite a ceasefire. Despite the violence, Poroshenko insists on a negotiated settlement. Some allies of Yanukovich will be in parliament in the new Opposition Bloc but communists will not be represented for the first time since independence from the Soviet Union in 1991. After months of beating back the separatists, Ukraine's troops suffered setbacks in August, which Kiev and its Western backers say was caused by Moscow sending armored columns with hundreds of troops to aid the rebels. Russia denied this. Voting did not take place in areas held by the rebels or in Crimea. Separatists in the east plan a rival vote on Nov. 2. (Additional reporting by Pavel Polityuk and Natalia Zinets,; and Thomas Grove in Donetsk; Editing by Giles Elgood)