The election should end months of political uncertainty that began with the collapse of the Socialist government in March and led Portugal to become the third country in the euro zone to seek a bailout after Greece and Ireland.
Results showed the PSD won 105 seats, or 39% of the vote, while the rightist CDS party obtained 24, allowing the two traditional government allies to have a strong majority in the 230-seat parliament. The Socialists won 73 seats, 24 less than in the last election.
"I will direct all my efforts as rapidly as possible to guarantee the country and the Portuguese will have a majority government led by the PSD that will give stability for the next four years," Passos Coelho told his party after the election.
CDS leader Paulo Portas said he was ready to rule together with the Social Democrats, allowing the incoming government to implement the austerity measures agreed with the European Union and the IMF as part of the rescue package.
"The country has shown unequivocal will to open a window of confidence and hope for the future," said Passos Coelho.
The election result showed that many Portuguese blamed the Socialists, in power for six years, for the country's economic crisis.
"It's a win that shows a big red card for Jose Socrates, who has left this country on its knees," said Julio Peixoto, 43, carrying a giant PSD flag outside the party's election campaign headquarters in Lisbon.
Socrates, who resigned as prime minister in March after his government failed to pass the austerity measures but stayed on in a caretaker capacity, said he was responsible for the defeat and quit as Socialist party head.
PSD to honour bailout terms
Passos Coelho said his government is fully committed to the terms of the bailout from the European Union and IMF.
He said he wanted Portugal "to win back confidence of markets which is essential for the country itself to recover".
A centre-right government will be welcomed by investors, who have lost faith in Portugal's assets in the past few months, dumping its bonds and pushing borrowing rates to euro-era highs.
"This result will be seen as positive by markets and investors," said Filipe Garcia, head of Informacao de Mercados Financeiros consultants in Porto. "It allows for a stable government that can last the full mandate and that is positive."
Socrates' minority government collapsed halfway through its term, weighed down by its inability to pass legislation in parliament as the sovereign debt crisis worsened.
"This big win will avoid a political impasse, which is what led Socrates' government to fall - it was unable to pass important legislation," said Garcia.
A centre-right coalition government should be able to quickly enact reforms and austerity measures included in the bailout, such as sweeping tax rises and deep spending cuts, to reduce Portugal's large deficit and debt.
Still, Portugal faces its highest level of unemployment in three decades and the economy is expected to contract 2% both this year and next, presenting the new government with tough challenges as disposable incomes fall and austerity takes its toll.
So far there have been few strikes or protests against austerity measures in Portugal, unlike Greece and neighbouring Spain, but analysts say that could change as the recession deepens.
EurActiv with Reuters
