By William James and Kylie MacLellan
LONDON (Reuters) - Prime Minister David Cameron won a stunning election victory in Britain, overturning poll predictions that the vote would be the closest in decades to sweep easily into office for another five years, with his Labour opponents in tatters.
The sterling currency, bonds and shares surged on a result that reversed expectations of an inconclusive "hung parliament" in which Cameron would have had to jockey for power with Labour rival Ed Miliband.
Instead, Cameron was due to meet Queen Elizabeth before noon to accept a swift mandate to form a government. The royal standard was raised at Buckingham Palace to signal the queen was there awaiting him.
"This is the sweetest victory of all," he told enthusiastic supporters at party headquarters. "The real reason to celebrate tonight, the real reason to be proud, the real reason to be excited is we are going to get the opportunity to serve our country again."
Miliband was expected to step down as Labour leader. He said on Twitter: "The responsibility for the result is mine alone."
Despite the unexpectedly decisive outcome, more uncertainty looms over whether Britain will stay in the European Union - and even hold together as a country.
Scottish nationalists swept aside Labour, meaning that Scotland, which voted just last year to stay in the United Kingdom, will send just three representatives of major British parties to parliament and be all but shut out of the cabinet. That could revive calls for it to leave the United Kingdom.
Cameron sounded a conciliatory note toward Scotland, likely to be his first immediate headache.
"I want my party – and, I hope, a government I would like to lead – to reclaim a mantle we should never have lost, the mantle of one nation, one United Kingdom," Cameron, 48, said after winning his own seat in Witney, Oxfordshire.
Cameron's victory also means Britain will face a vote which he has promised on continued membership in the EU. He says he wants to stay in the bloc, but only if he can renegotiate Britain's relationship with Brussels.
Jean-Claude Juncker, president of the EU's executive European Commission, congratulated Cameron on his victory. The Commission would examine any British proposal "in a polite, friendly and objective way," a Commission spokesman said.
Smiling beside his wife Samantha, Cameron returned to the prime minister's office in Downing Street early on Friday. He was expected to declare victory outside the black door of Number 10 Downing Street after his meeting with the queen.
With a handful of seats still to be declared in the 650-seat house, the Conservatives surpassed the 325 seat threshold of an effective majority that allows them to govern alone for the first time since 1992.
The margin of victory was a surprise even to Cameron, who said he "never quite believed we'd get to the end of this campaign in the place we are now."
That means Cameron no longer needs the Liberal Democrats, with which he has governed since 2010.
The center-left party, heir to one of the most storied liberal parties in Europe, was crushed, reduced to single digits after winning 57 seats five years ago. It's leader, Nick Clegg, held his own seat but resigned as party chief.
"It is simply heartbreaking," he said of the losses. "Clearly the results have been immeasurably more crushing and unkind than I could ever have feared."
Among the other stunning results, Ed Balls, in line to be finance minister if Labour had won, lost his seat. He fought back tears as he expressed sorrow at Labour's defeat.
"Any personal disappointment I have at this result is as nothing compared to the sense of sorrow I have at the result that Labour have achieved across the UK tonight ... and the sense of concern I have about the future," he said.
The UK Independence Party, a populist group that demands withdrawal from the EU, surged into third place in the countrywide vote tally, but that translated into a win of only a single seat. Its charismatic leader Nigel Farage lost his own bid for a seat. He stood down as party leader but said he might seek the leadership again later this year.
Sterling gained more than 2 cents against the dollar <GBP=D4> to rise above $1.55 for the first time since late February, and looked on track to enjoy its biggest one-day gain against the euro <EURGBP=> since January 2009.
The FTSE 100 stock index <.FTSE> was up 1.45 percent at 6985, approaching a record high set last month. The price of British government bonds also rose.
SCOTTISH "TSUNAMI"
With almost all of Scotland's 59 parliamentary seats counted, the Scottish National Party (SNP) had won 56 of them, up from just six five years ago, all but obliterating Labour in one of its historic strongholds.
"We're seeing an electoral tsunami on a gigantic scale," said Alex Salmond, the party's former leader, now elected to represent it in parliament in London. "The SNP are going to be impossible to ignore and very difficult to stop."
The United Kingdom includes England, Scotland, Northern Ireland and Wales. England accounts for 85 percent of the UK population but Scottish politicians elected to parliament in London have historically held important government posts. That will now be impossible with the SNP holding nearly all Scottish seats.
In a body blow to Labour that set the patter for the night, Douglas Alexander, the party's campaign chief and foreign policy spokesman, lost his seat to a 20-year-old Scottish nationalist student, the youngest member of the House of Commons since 1667.
Miliband, a self-described "geek", never quite connected with working-class voters. He ran a campaign widely seen as better than expected, but was always far behind Cameron in polls that asked voters who they saw as a more credible leader.
"This has clearly been a very disappointing and difficult night for the Labour Party," he told supporters after retaining his own parliamentary seat in Doncaster, northern England.
UKIP's surge into third place in the overall vote tally, mirroring the rise of similar populist groups elsewhere in Europe, failed to yield it a strong presence in parliament under Britain's system in which candidates must place first in districts to win seats. It racked up scores of second place finishes across the country.
One other loser is the opinion polling industry which is likely to face an inquest over its failure to predict the outcome. Before the election, virtually all opinion polls had shown the Conservatives and Labour neck-and-neck.
(Writing by Guy Faulconbridge; Additional reporting by Paul Sandle, Ahmed Aboulenein, Kate Holton, Andrew Osborn, David Milliken, Maytaal Angel, Angus MacSwan, Alistair Smout, Andy Bruce; Editing by Peter Graff)