With 100% of the ballot counted, it emerged that the right-wing National Unity Party (UBP) had clinched 44.06% of the vote, provisionally giving it an outright majority in the 50-seat parliament. It was a stinging defeat for the ruling Republican Turkish Party (CTP), a key ally of Turkish Cypriot leader Mehmet Ali Talat.
Just under 162,000 people voted in the parliamentary elections in Northern Cyprus, recognised only by Turkey.
The CTP, which bore the brunt of public discontent over a faltering economy and continued international isolation of the breakaway territory, took 29.25% of the vote.
The UBP advocates an outright two-state settlement on Cyprus, at odds with the federal model now being discussed by Talat and Greek Cypriot leader, President Demetris Christofias.
The Greek Cypriots represent Cyprus in the European Union and say they will block Turkey's admission to the EU as long as the island remains divided. Turkey is currently in entry negotiations, but there is strong resistance to Ankara's entry among several member-states.
Talat will retain his leadership of the territory, but his room for manoeuvre is likely to be limited by a parliament now dominated by the UBP.
The basis of the current talks is reuniting the island as a bizonal federation. The UBP says it wants a rethink of the process.
"We will continue to support negotiations," said UBP leader Dervis Eroglu. "No-one should say we are against them. We will put forward our views and discuss them within the framework of Turkey's foreign policy on Cyprus."
In an earlier interview with Turkey's Zaman newspaper, Eroglu was quoted as saying: "Everything will be easier if it is universally accepted that we [Turkish Cypriots] are a nation and that we have a state."
Greek Cypriots refuse to discuss Turkish Cypriot sovereignty, and say a deal should see the evolution of the internationally recognised Republic of Cyprus into a federation, rather than a loose association of two states.
Greek Cypriots issued a chilly response to the election result. "We will have bigger problems, that is my prediction," Christofias said, referring to the election.
Talat, whose own tenure as president expires in April 2010, said the winner of Sunday's poll should not disrupt reunification negotiations.
"A government [in Northern Cyprus] that seeks to scupper the talks will also be harming Turkey's EU accession process," he told Havadis, a Turkish Cypriot daily.
Analysts said Turkey, which supported a UN peace blueprint for Cyprus rejected by Greek Cypriots in 2004, would not want a disruption of settlement talks.
"Turkey is going to continue on its EU path and wants [Northern Cyprus] to do the same," said Ahmet Sozen, a lecturer in international relations at the Eastern Mediterranean University. "Turkey has sent a message to all political players in northern Cyprus that a no-solution policy is not a policy any more."
Talat and Christofias are negotiating on complex and divisive issues such as power-sharing, property rights and territorial adjustments.
The United Nations envoy for Cyprus, Alexander Downer, said last week the negotiations had been making "steady progress".
(EurActiv with Reuters.)