Bruised Irish rivals allow Sinn Fein government initiative

* Irish nationalists Sinn Fein won most votes in Saturday poll

* Sinn Fein's talks with smaller parties unlikely to succeed

* Bruised Fine Gael and Fianna Fail stand aside for now

* Ultimate government call likely to fall to Fianna Fail

By Padraic Halpin

DUBLIN, Feb 11 (Reuters) - Ireland's Fianna Fail and Fine Gael let Sinn Fein proceed with trying to form a government without them on Tuesday, a process most acknowledged would ultimately require two of the now three largest parties to work together.

Sinn Fein, a left-wing Irish nationalist party, stunned the establishment by winning the highest number of votes in Saturday's poll but its low number of candidates meant it finished between the two centre-right parties by number of seats.

Sinn Fein leader Mary Lou McDonald said her party "won the election" and would try to form a left-wing led government with smaller parties and independent lawmakers, technically possible but a task even some of her senior colleagues said was highly unlikely to succeed.

Prime Minister Leo Varadkar's Fine Gael and historical rival Fianna Fail, which have led every previous Irish government but fell to their lowest ever combined level of support, were also sceptical but happy to let others talk while they regrouped.

"Mary Lou McDonald is the leader of the party who got the most votes in the election and should now do what she says she's going to do," Health Minister Simon Harris of Fine Gael told national broadcaster RTE.

"She made a lot of promises, a lot of commitments, let her off now and see if she can try and form a government. If she can't, I do think there is an obligation on the centre of Irish politics, which still won a hell of a lot of votes by the way."

Fine Gael has strongly ruled out governing with Sinn Fein, citing policy differences and the nationalist party's role as former political wing of the Irish Republican Army (IRA)

The IRA fought against British rule in Northern Ireland for decades in a conflict in which some 3,600 people were killed before a 1998 peace deal.

Harris said a pre-election offer of a first ever full coalition with Fianna Fail still stood.

UNCERTAINTY

Fianna Fail insisted it would not enter government with either party during the campaign, although its leader declined to repeat earlier outright refusals to consider Sinn Fein, saying only there were significant incompatibilities on policy.

There are open divisions over such a tie-up among Fianna Fail lawmakers, who won 38 seats to Sinn Fein's 37 in the 160-seat parliament. Fine Gael have 35 seats.

Analysts say it will eventually come down to whether Fianna Fail is willing to negotiate with Sinn Fein and if they can even then agree to a policy programme its members would back. The process could take weeks or months, they say.

"The momentum is with Mary Lou McDonald, there's no doubt about that, but at some point Fianna Fail will have to make a crucial decision as to which way to go," said Theresa Reidy, a politics lecturer at University College Cork,

"If those kind of refusals continue, we are looking at a second election, although it is very unlikely any of the parties will want that. There are a lot of obstacles on the pathway to an arrangement (between Fianna Fail and Sinn Fein) too and that is why it is really very uncertain where we go from here."

(Additional reporting by Graham Fahy Editing by Gareth Jones)