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Peru's presidential candidate Keiko Fujimori celebrate after exit polls of the first round of Peru's presidential election in Lima, Peru, April 10, 2016. REUTERS/Paco Chuquiure

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By Ursula Scollo and Mitra Taj

LIMA (Reuters) - Peruvian markets jumped on Monday as results showed two free-market candidates would move on to the second round of the presidential election: Keiko Fujimori, the conservative daughter of a jailed former president, and centrist economist Pedro Pablo Kuczynski.

With 88 percent of votes counted, Fujimori had 39.5 percent support while Kuczynski, 77, a former World Bank economist widely known by his initials 'PPK', had 21.6 percent. Leftist Veronika Mendoza trailed with 18.5 percent.

Peru's select stock index <.SPBL25PT> rose nearly 12 percent, its biggest daily gain since 2008. The sol <PEN=PE> currency closed bidding 2.67 percent stronger at 2.8 per dollar, its strongest rise since 1992.

The free-market model that has been in place for 25 years in Peru would be maintained in either a Kuczynski or Fujimori presidency, and their parties look likely to dominate congress.

"On paper, both programs are very similar," said Pedro Tuesta, an economist with 4Cast, adding that Kuczynski viewed the use of supply-side economics to boost growth more favorably, something that could increase deficits.

Markets had fallen over the past week on concerns about Mendoza, 35, who had called for new central bank management to lower interest rates, the diversion of natural gas exports to the domestic market and a smaller role for the country's key mining sector.

Fujimori, whose father Alberto was Peru's authoritarian leader throughout the 1990s, fell far short of the 50 percent of votes needed for outright victory in the first ballot and will probably be vulnerable in the second round vote on June 5.

"It's a totally different campaign, but we think it will be easier for us because anti-Fujimori sentiment is very strong and it will be hard for her to shake that off in the short term," said Kuczynski adviser Alfredo Thorne.

Despite her lead after Sunday voting, polls have shown opposition to Fujimori has grown since the start of the year, part of the fallout from the electoral board's controversial decision to toss two of her rivals from the race while clearing her of vote-buying allegations.

Many who opposed Alberto Fujimori's divisive rule planned to rally behind her rival, whether Kuczynski or Mendoza.

The son of European immigrants, Kuczynski is a pro-business economist and a former finance minister but is more moderate on some social issues than Fujimori, 40, and does not have the baggage associated with her last name.

"I believe we can return to economic growth of 5 percent per year with a few measures," he said on Monday.

Kuczynski said if Congress passed a law to allow older convicts, including the elder Fujimori, to complete their sentences at home, he would sign it if he became president.

Keiko Fujimori has said she would drive economic growth forward, as a decade-long mining boom fades, by tapping a rainy-day fund and issuing new debt to fund badly needed infrastructure. She has portrayed herself as the only candidate who would be sufficiently tough on crime.

Fujimori's chances in the run-off will depend largely on whether she can distance herself from her father, who was convicted of corruption and human rights abuses tied to a crackdown on leftist insurgents during his 1990-2000 rule.

SHINING PATH

In a reminder of that bloody conflict, rebels presumed to be remnants of the Shining Path ambushed soldiers sent to safeguard ballots on the eve of the election, leaving at least six dead.

Fujimori criticized President Ollanta Humala, a former military officer who defeated Fujimori during her first presidential bid in 2011.

"I'm sorry this government had allowed not only crime to advance in the streets but has also permitted Shining Path to keep taking lives and shedding blood in our country," Fujimori said as she celebrated her first-round win.

On track to become the world's second-largest copper producer, Peru has enjoyed nearly two decades of uninterrupted economic growth.

Despite its vast natural resources, Peru remains largely undeveloped outside its main cities, and many voters say Humala failed to fulfill his promises of reducing inequality of wealth.

Presidents are not allowed to run for consecutive terms in Peru. Humala has not endorsed any candidate and criticized the electoral board for disqualifying two of Fujimori's rivals. Julio Guzman was ousted for violating minor electoral procedures and Cesar Acuna for handing out cash while campaigning.

Fujimori has promised, if elected, not to use her power to free her father from prison, but she believes the courts will ultimately absolve him.

Human rights activists remain wary, and protests on April 5, 24 years after Alberto Fujimori dissolved Congress, drew tens of thousands of Peruvians.

An Ipsos opinion poll afterward showed Fujimori would probably lose to Kuczynski by seven points if they faced each other in a run-off. Fujimori's rejection rates also jumped, with 51 percent of Peruvians saying they would "definitely not" vote for her.

(Additional reporting by Caroline Stauffer, Marco Aquino and Teresa Cespedes; Editing by Nick Zieminski and Andrew Hay)

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