(Adds further reaction)

By Hasmik Mkrtchyan and Margarita Antidze

YEREVAN, May 13 (Reuters) - Pro-presidential parties won a large majority in Armenia's parliamentary election, its electoral commission said on Sunday, a poll that monitors said was fair and which confirmed support for the prime minister.

The winner of the election -- viewed as a dress rehearsal for the presidential vote next year -- was Prime Minister Serzh Sarksyan who heads the Republican party, which will control around 40 percent of the 131 seats in parliament.

Sarksyan is a 52-year-old former welder and a trusted lieutenant of Armenia's President Robert Kocharyan.

This was the first election former Soviet Armenia has held that Western observers said was fair and the statement from the Organisation for Security and Cooperation in Europe (OSCE) and the Council of Europe dampened potential street demonstrations.

On Wednesday police had fired tear gas to break up an opposition rally in central Yerevan where demonstrators had protested against what they said would be a rigged election.

The 2003 parliamentary election was described as below democratic standards.

"The Armenian elections were an improvement from previous elections and were largely conducted in accordance with international standards for democratic elections," Tone Tingsgaard, one of the leaders of the 400 OSCE monitors, said.

"Some issues remain and more is needed to consolidate this democracy."

Observers highlighted the close relationship between businesses and politicians as a concern and an inadequate electoral complaints procedure. One of the pro-presidential parties is run by a millionaire businessman.

But the message was enough to dampen support and enthusiasm for a protest against rigged elections when a few thousand people gathered to listen to the fringe opposition leaders.

"There was no election yesterday, there was just a coup d'etat," Nikol Pashinyan, one of the leaders of the Impeachment party, told the crowd. "The organisers of the election should be punished."

But unlike the violent clashes between demonstrators and police on Wednesday the mood in Yerevan on Sunday was calm and quiet, a Reuters correspondent said.

"BEST ELECTION EVER"

And the European Union was quick to endorse the election results which it said represented significant democratic progress, although there was some work to do.

"Looking ahead to the presidential elections due to be held at the beginning of 2008, the presidency calls on Armenia to investigate and resolve the procedural problems which still exist," it said in a statement.

"The presidency of the European Union is very much in favour of intensifying cooperation with Armenia."

Armenia is Russia's main ally in the Caucasus. It nestles on the southern edge of the region which has emerged as a major transit route for oil from Central Asia to Europe, and also borders Turkey and Iran.

The politics of the country are largely about personalities rather than policies. The mainstream opposition parties offer similar policies to the ruling coalition.

The Republican party's two allies will control around 35 percent of the new parliament, the election commission said.

Sarksyan has held various ministerial positions since the 1991 collapse of the Soviet Union before being made prime minister in March when his predecessor died of a heart attack.

"This election was the best election in the history of Armenia and has created a good base for the presidential elections next year," Armen Ashotyan, a Republican member of parliament, told Reuters.

"We will be favourites in the presidential race next year."

The main opposition leader is considered to be Artur Baghdasaryan, a former ally of President Kocharyan, and head of the Orinats Yerkir (Country of Laws) party.

Baghdasaryan's party won around 7 percent of the parliamentary vote, the election commission said, enough to clear the 5 percent barrier and win seats in Parliament.

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