* New Zealand dollar has bounced back after August slide
* Volatility likely until government make-up is clear
* National government could underpin NZ dollar
By Ana Nicolaci da Costa and Charlotte Greenfield
WELLINGTON, Sept 24 (Reuters) - The New Zealand dollar is set for more volatility in coming weeks after a general election left New Zealand's major parties with no majority to govern, forcing them to enter negotiations with the nationalist New Zealand First Party.
The ruling National Party secured the largest number of votes in Saturday's election but two of its possible allies lost seats in parliament, making it rely on New Zealand First and its outspoken leader, Winston Peters, to form a coalition.
Labour could also still be in a position to rule, if together with the Green Party, it gets New Zealand First on board. Negotiations are likely to carry on for weeks, with a final tally, including a large number of overseas votes, not due until Oct. 7.
"I wouldn't be surprised to see the Kiwi a little more volatile on this result," Stuart Ive, dealer at OM Financial said on Sunday, referring to New Zealand dollar.
"Clearly when we open on Monday morning we're at the moment no better off – it's either going to be Labour or National leading the country."
Last month, the New Zealand dollar fell more than 4 percent against the U.S. dollar to be the worst performer amongst major currencies, and underperformed its Australian counterpart as political jitters and worsening data weighed.
POLICY IMPLICATIONS
The Kiwi, which was the 11th most traded currency in the world in 2016, has tended to fall when the Labour Party led in the polls due to their "unknown" factor and risen when it showed a lead for National, which has been in power for nearly a decade.
New Zealand has out-performed most of its developed market peers since the global financial crisis, with growth averaging 2.6 percent a year over the past 2.5 years and the government balancing its books.
Critics say much of the growth has come from immigration which has helped fuel a sharp jump in house prices that has in turn widened the gap between rich and poor.
Labour is planning to reduce immigration by up to 30,000 from a record 70,000 a year currently. It also plans to renegotiate certain trade deals to accommodate for a planned ban on foreign ownership of existing homes.
Some economists say those policies would stifle two key sources of New Zealand's robust growth of recent years, although the impact on growth could be somewhat offset by its plan to build 100,000 affordable home over 10 years.