Business confidence at 5 pct in Q3 Lowest since March 2016...

• Business confidence at 5 pct in Q3
• Lowest since March 2016
• General election, construction constraints drag on optimism

(Adds economist quote, detail)

WELLINGTON, Oct 3 (Reuters) - New Zealand business confidence was hit by a turbulent election campaign in the third quarter with political uncertainty likely to drag on as politicians battled to form a government, a private think tank said on Tuesday.

A net 5 percent of firms surveyed expected general business conditions to improve, the lowest since March 2016, compared with 18 percent in the previous quarter, said the New Zealand Institute of Economic Research's (NZIER)

The quarterly survey of business opinion (QSBO) was carried out during the tumultuous campaign in the lead-up to the hotly contested vote on Sept. 23, as investors and households held off from committing to any major plans during the uncertain period.

"It's not unusual for business confidence to be falling ahead of the election … given the uncertainty of the formation of the new government," said Christina Leung, economist at NZIER, adding that the fall was moderate compared to previous pre-election drops.

Neither major party had won enough seats in Parliament to form a government, casting populist New Zealand First Party leader Winston Peters as kingmaker.

That stalemate could weigh on business confidence into the fourth quarter.

"The longer coalition talks drag out then the more uncertainty that causes and the more prolonged that decline of confidence is likely to be," said Leung.

Hiring and investments intentions remained robust and NZIER expected confidence to bounce back once a government was formed.

Nevertheless the result would reinforce the Reserve Bank of New Zealand's determination to keep rates at a record low of 1.75 percent and the NZIER expected the bank to hold rates until at least late 2018.

The construction sector, previously a powerhouse behind the country's economic growth, plummeted to a two-year low of 3 percent from 18 percent the previous quarter on capacity constraints.

"Labour shortages, particularly skilled labour remain acute in the building sector," said Leung.

The survey's measure of capacity utilisation was 91.3 percent, from the previous quarter's 92.1 percent.

The New Zealand dollar nudged a touch lower to $0.7188 from around $0.7195 before the survey results were released.