Dutch Prime Minister and Liberal Party leader Mark Rutte (C) hands out flyers in The Hague

Dutch Prime Minister Mark Rutte won a closely contested election as voters handed pro-European parties a sweeping victory, shunning the radical fringes and dispelling concerns that eurosceptics could gain sway in a core euro zone country.

With 96 percent of votes counted, Rutte's centre-right Liberals won 41 seats in the 150-member lower house, a slender two-seat lead over the centre-left Labour Party on 39 seats, based on results early on Thursday morning.

"We won our greatest victory in history and for the second time became the largest party in the Netherlands," Rutte told supporters after Labour leader Diederik Samsom telephoned him to concede defeat, reports Reuters.

"We fought this election house by house, street by street, city by city, and I'm proud. Tomorrow I will take the first steps leading to the formation of a cabinet."

Rutte declined to say which parties he would approach as coalition partners. The Liberals and Labour have played down talk of forming a coalition together. But parliamentary arithmetic suggests that is the most probable outcome given the highly fragmented political landscape.

"They are condemned to work with each other. It shows the Dutch people want a stable government," said Andre Krouwel, a political scientist at Amsterdam's VU University.

The hard-left Socialists, who oppose austerity and euro zone bailouts, finished a distant third and gained no ground, while the far-right anti-immigration Freedom Party (PVV) of Geert Wilders, who campaigned to leave the euro and the European Union, slumped and was set to lose nearly its seats.

The two radical parties dominated early stages of the campaign, raising the prospect of a massive protest vote that might paralyze government and make Dutch support for further euro zone bailouts impossible.

The unexpectedly clear result removed a potential obstacle to efforts to stabilize Europe's single currency after Germany's constitutional court gave the green light for the euro zone's permanent bailout fund to go ahead.

However, the Netherlands is likely to remain an awkward, tough-talking member of the single currency area, strongly resisting transfers to euro zone debtors, even if the two main parties end up forming a coalition.

The campaign ended up as a two-horse race between Rutte, 45, a former Unilever human resources manager dubbed the "Teflon" prime minister because of his ability to brush off disasters, and energetic new Labour leader Samsom, 41, a former Greenpeace activist whose debating flair impressed voters.