UPDATE 3-Kurdish MPs to stay in Turkish parliament

* Party supporters opposed quitting parliament

* Jailed militant PKK leader also opposed quitting

* MPs to join new party

* Party aims to create parliamentary group

(Adds banned party leader's comments)

By Pinar Aydinli

ANKARA, Dec 18 (Reuters) - Deputies from Turkey's main pro-Kurdish party decided to stay in parliament despite a court decision to ban their movement, its banned leader said on Friday, removing a potential source of political instability.

The 19 deputies had been expected to resign in protest at the Constitutional Court verdict last week in a move which could have led to by-elections in the mainly Kurdish southeast.

The decision is likely to be a relief for Prime Minister Tayyip Erdogan, whose efforts to solve the long-running Kurdish conflict were undermined by a court ruling that was seen as a blow by the nationalist establishment against his reforms.

"The most important thing to us is our democratic effort. Our voters and nation have asked us to stay in parliament," Democratic Society Party (DTP) leader Ahmet Turk, who himself was banned from politics for five years, told a news conference.

Turk, whose party was found guilty of links to separatist Kurdistan Workers Party (PKK) rebels, said jailed PKK leader Abdullah Ocalan had also called for them to remain in parliament via his lawyers this week.

Kurds, who make up some 20 percent of Turkey's 70 million population, have long complained of discrimination and were forbidden from using their language for decades.

The European Union has criticized the court ruling, which was seen as potentially damaging to the secular Muslim country's faltering bid to join the bloc. Erdogan also was critical of the ban, saying on principle he was against closing parties.

Turkish financial markets showed no initial reaction, but it was seen removing a source of uncertainty ahead of 2011 parliamentary polls.

"It will eliminate concerns regarding early elections and political tension in the short term," BGC Partners economist Ozgur Altug said.

He said the market had so far ignored developments, but equities could react positively.

The main share index was up 0.3 percent in afternoon trade, little changed from before the decision.

DEPUTIES TO JOIN NEW PARTY

Turk said the DTP deputies decided to join the pro-Kurdish Peace and Democracy Party (BDP), which was formed after the court case against the DTP was opened, and is regarded as a potential replacement in the case of a ban.

He said the deputies would attempt to form a parliamentary group, a key step in maintaining their influence in the assembly. The party would need 20 MPs to do so, meaning they would need to attract another deputy to their ranks.

The court verdict, under a controversial political parties act, had triggered violent protests across Turkey, with Kurds clashing with security forces.

The PKK, termed a terrorist group by Ankara, the United States and EU, launched its armed fight for a Kurdish state in 1984 and 40,000 people have been killed in the conflict.

Erdogan has sought to overcome the longstanding conflict by pledging economic development for the backward southeast, granting Kurdish-speakers rights to broadcast in their own language and improving ties with neighboring Iraq, including its autonomous Kurdish regional government.