Hong Kong's pro-democrats breathed a sigh of relief on Monday after retaining the key power to veto constitutional reforms following the city's legislative elections.

Despite predictions that post-Olympic patriotism, factional infighting and scant election resources would hit their prospects, the various pro-democracy parties held on to all but two of their seats.

They now hold 23 out of 60 seats in the city's legislature, with the others mainly held by pro-Beijing or pro-Hong Kong government parties, results from Sunday's election showed.

If the pan-democrats had slipped below 21 seats they would have lost the ability to veto government legislation, which they successfully used in 2005 to block controversial constitutional reforms.

Meanwhile the pro-business Liberal Party was in disarray after its top two leaders were forced to resign for losing their directly-elected seats.

Ivan Choy, a political commentator at Chinese University, said that chief executive Donald Tsang, whose popularity has slipped in recent months after a string of blunders, should take heed of the results.

"The success of the League of Social Democrats (who won three seats) issues a warning sign to the government," said Choy.

"They represent the grassroots' voice and are expected to take an aggressive, hardline stance towards issues such as minimum wage."

Despite enjoying a China-fuelled boom in recent years, economic concerns have grown in Hong Kong as the stock market has tumbled. Pre-election polls showed inflation was the number one election issue.

The government has introduced a series of counter-measures, but concern about the poorest members of society missing out on the growth has increased, marked by the unusual sight of strikes in the city.

Several leading democrats who had feared losing seats, including radical activist "Long Hair" Leung Kwok-hung, won with a surprisingly comfortable cushion.

The Liberals' defeat and the success of those with strong grassroots operations, such as Leung's League of Social Democrats, showed the city's politics had shifted from ideological to more practical concerns, analysts said.

"Having a high profile no longer guarantees success," said Gary Cheung, a political commentator and former chairman of the pro-Beijing Democratic Alliance for the Betterment and Progress of Hong Kong.

"The candidates need to have actually done something for their constituents if they want to have votes."

Leung, who is well-known for a series of anti-government stunts, took undisguised delight in his defeat of Liberal Party chairman James Tien.

"He deserved it. His party not only ignores the grassroots, they don't even care about the middle class," said Leung. "They are only there to protect a small group's interests."

Tien said he was very disappointed with the result, which he blamed on the party's failure to organise at a local level.

"I will step down and quit politics," he told reporters.

Only 30 of the 60 legislative seats were chosen by the city's 3.37 million registered electors in Sunday's poll.

The remaining 30 "functional constituencies" representing various business and industry interests were chosen by select electorates, with the vast majority returning pro-government candidates.

Hong Kong was promised universal suffrage for both its legislature and chief executive when Britain returned the territory to China in 1997, but no specific timetable was set.

Late last year, Beijing said universal suffrage could be introduced here from 2017.