Georgian President Mikheil Saakashvili conceded on Tuesday that his party had lost the election to a coalition led by billionaire Bidzina Ivanishvili, paving the way for a peaceful transfer of power in the former Soviet republic.

"Despite a very polarising campaign ... the Georgian people have freely expressed their will at the ballot box," said Tonino Picula, a leader of the monitoring mission representing the Organization for Security and Cooperation, lawmakers from NATO, the European Parliament and the Council of Europe.

A statement released by the observers said Georgia had taken important steps in "consolidating the conduct of democratic elections, although certain key issues remained to be addressed."

These included some instances of harassment and intimidation of party activists and supporters during the election campaign which created an atmosphere of distrust, it said.

"Despite shortcomings, these elections were very competitive," Luca Volonte, the head of the Parliamentary Assembly of the Council of Europe (PACE) delegation, was quoted as saying.

"The political forces elected to the new Parliament, both in the majority and opposition, should now take up their responsibilities and work together to address these shortcomings for the further democratic development of the country."