(Recasts, adds quotes, details, background)
By Manoj Kumar and Satarupa Bhattacharjya
NEW DELHI, March 20 (Reuters) - The Indian government is unlikely to call a snap election despite its biggest ally abruptly quitting the ruling coalition, as it needs time to implement flagship welfare schemes and hopes the economy will improve, government sources said on Wednesday.
The withdrawal of the Dravida Munnetra Kazhagam (DMK) has rattled markets, which are worried that it has left Prime Minister Manmohan Singh unable to pass reforms needed to turn around the worst economic slowdown in a decade.
That, in turn, has fired speculation that the government, which is in a minority in parliament and relies on the support of powerful but unpredictable regional parties to stay in power, could call a quick election before its term officially runs out next year.
However, leaders in the ruling Congress party told Reuters the government will wait in order to pass legislation aimed at shoring up its popularity, which has been punctured by corruption scandals and anger over high prices.
"We have been given a mandate for five years and we intend to ensure that it is not aborted," Jairam Ramesh, rural development minister, told Reuters.
But big-ticket economic reforms such as opening the pensions and insurance sectors to foreign investors are likely to face stiff opposition in parliament, analysts said. A major regional party that often votes with the government said on Tuesday it would oppose the measures.
It particular, the government wants to pass a bill ramping up food subsidies for hundreds of millions of poor who form its core vote base and helped it win back-to-back general elections. It also wants to widen a system - currently being rolled out in different parts of the country - of handing out money to poor families to pay for essentials such as cooking gas.
"We are not looking to hold early elections. We want to do the full term not just to pursue our welfare programmes but also to allow the economy to revive," said a senior Congress party official.
Senior party leaders also hope that India's economic climate will improve in line with predictions from the finance ministry, which has forecast growth picking up to 6.1 percent or more next fiscal year from 4.5 percent in the last quarter.
Congress is also worried that it does not yet have a credible leader to replace the 80-year-old Singh.
Rahul Gandhi, the son of party chief Sonia Gandhi who is seen by many as the prime-minister-in-waiting, has faced questions over his leadership capabilities and has so far shown reluctance to step into Singh's shoes.
"There is no strong leader in the party today," a party leader said.
NO 'LAME DUCK'
News of the DMK's withdrawal, which was sparked by a row over censuring Sri Lanka for alleged war crimes committed during the island nation's civil war, sent shares to their lowest levels in more than two weeks.
The government sought on Wednesday to dispel the notion that it has become a "lame duck" administration, and said it was still able to pass reform legislation in parliament.
"I am sure on the merits of reform bills, political parties will support the government," Finance Minister P. Chidambaram told a news conference, adding that the DMK pullout would not affect the government's ability to cut the fiscal deficit.
He would not answer a question on whether an early election was likely.
The DMK submitted a formal letter of withdrawal to the Indian president on Tuesday night, and its five ministers submitted their resignations on Wednesday.
The source of the row is a draft U.N. resolution on allegations that Sri Lankan troops committed war crimes in the closing stages of the 25-year-long civil war against its minority Tamil population, charges Sri Lanka denies.
The DMK wants India move amendments to the resolution to say that Sri Lankan forces committed "genocide" during the civil war, and get an international commission to investigate abuses.
The DMK, based in the southern state of Tamil Nadu, has often pressured the Indian government to do more to protect Sri Lanka's minority Tamil population.
Chidambaram said that the government was working towards amendments and was therefore surprised at the DMK's pullout. (Reporting by Manoj Kumar, Nigam Prusty, Annie Banerji, Anupama Chandrasekaran and the Mumbai bureau; writing by Matthias Williams, editing by Ross Colvin)