SINGAPORE (Reuters) - Singapore Prime Minister Lee Hsien Loong basked in his party's thumping election victory on Saturday, declaring it a sign that the city-state has found a formula to keep it on the path of success half a century after it won independence.

The People's Action Party (PAP), which has ruled without interruption since 1965, brushed off an opposition challenge in the country's most hotly contested poll, increasing its share of both the popular vote and seats in parliament.

The PAP was always expected to win but opposition parties, contesting in all seats for the first time, had hoped that popular resentment over a widening wealth gap, high prices and immigration would dent its domination of politics.

Lee told a news conference that his government had taken steps to meet such concerns and would take more.

"We will redouble these efforts - but we must do this in a way that maintains the unique strengths of our system," he said.

"These strengths include the ability to maintain a national consensus, to keep politics clean, to contain populist pressures while being responsive to popular needs."

The PAP won about 69.9 percent of the vote, above the 60.1 percent it won in the last election in 2011, its worst-ever showing. In the last parliament it had 79 of a total 87 seats.

It won 83 of the 89 seats in an expanded parliament, while the opposition Workers' Party ended up with six seats, one less than it held in the outgoing parliament.

The PAP had been banking that a sense of patriotism inspired by this year's 50th anniversary of independence and respect for the country's independence leader and former premier Lee Kuan Yew, who died in March, would work in its favor.

Lee was the father of the current prime minister.

The elder Lee drew praise for his market-friendly policies, but also criticism at home and abroad for his strict controls over the press, public protest and political opponents.

"These results are also a strong signal of confidence to ourselves, that we Singaporeans in the post-Lee Kuan Yew era are able to find the winning formula which can keep us progressing and succeeding," said Prime Minister Lee, who hours earlier had been carried on the shoulder of jubilant supporters as election results came in.

SWING BACK TO SAFETY

The election came amid growing economic risks stemming from China's slowdown and wobbly financial markets. Singapore's DBS Bank this week cut its growth forecast for Singapore to 1.8 percent, below the official forecast of 2-2.5 percent.

"In the end there was this flight to safety given the economic uncertainties," saidEugene Tan, a political analyst and associate professor at Singapore Management University.

Years of strong growth turned Singapore into a global financial hub with spotless streets and malls, well-tended parks and living standards unmatched in Southeast Asia.

But that success and an influx of foreign workers have brought high property prices, crowded public transport and a widening income gap which have fueled resentment among many in a city that surveys rank as one of the world's most expensive.

Opposition parties had hoped to take advantage of the grumbling and drew big crowds at rallies, in which candidates focused on basic issues of jobs, healthcare and housing.

The PAP was forced to shift slightly to the left after its poor showing in 2011 to address an emboldened opposition's calls for a better deal for middle- and lower-class voters.

The government launched a multi-billion-dollar healthcare insurance program for the elderly, introduced measures to cool the property market and curbed the flow of foreign workers.

(Additional reporting by Aradhana Aravindan, Chyen Yee Lee, Fathin Ungku, Edgar Su, Anshuman Daga and Christophe Van Der Perre; Editing by John Chalmers & Kim Coghill)