In a ballot to select the party's prime ministerial candidate, Costa, 53, easily defeated party leader Antonio Jose Seguro, 52, who announced his resignation after the result.

Costa, popular among the people of Lisbon, will become prime minister if the Socialists win the election, due to be held in October 2015, but the party's lead in the polls has been slipping.

"The only victor today is the Socialist Party ... This is the first day of our future (parliament) majority," Costa said in his victory speech.

The mayor is also seen as likely to become leader of the party following Seguro's departure.

Costa, who served as justice minister and interior minister in previous Socialist governments and as a European parliament deputy before being elected mayor in 2007, garnered nearly 70 percent of the vote. Almost 250,000 party members and supporters were registered to vote in the election.

Opinion polls put the Socialists ahead of the Social Democratic party of Prime Minister Pedro Passos Coelho, but they have been trailing behind the two-party ruling coalition since May, when the Socialists won the European elections by a surprisingly narrow margin of just 3.8 percentage points.

Analysts and many senior Socialists, including Costa, viewed that as an extremely poor result taking into account that Passos Coelho's government had imposed unpopular austerity measures such as tax hikes, and wage and pension cuts under the country's bailout from the European Union and IMF since 2011.

Costa first offered to lead the party in May, a decision described as "treachery" by Seguro at one point who later agreed to hold an election to pick a leader to stand as the party's candidate to be prime minister.

Lisbon exited its bailout program in May with the economy recovering and the country regaining normal access to the debt market.

The latest opinion poll, released earlier this month by Eurosondagem pollsters, showed the Socialists would win 33 percent of the vote in a general election, five points ahead of the Social Democrats, but well short of a parliamentary majority.

When added together with the 7.5 percent for smaller coalition partner CDS-PP, the government outpolled the Socialists.

Seguro became party leader after the Socialists were voted out of office in a snap election in 2011 after they were forced to request the international bailout due to the country's acute debt crisis which had left it on the verge of bankruptcy.

Although the Socialists promote anti-austerity rhetoric, analysts say the party would have little choice but to continue the general course of budget discipline and lower deficits if it wins power again. They also do not rule out a centrist coalition between the Socialists and the Social Democrats.

Portugal has to cut its budget deficit to 4 percent of gross domestic product this year and to 2.5 percent in 2015, from 4.9 percent last year, as part of its commitments to lenders.

(Reporting By Andrei Khalip; Editing by Susan Fenton)