Merkel's conservatives suffer losses in European vote

BERLIN (Reuters) - German voters punished Chancellor Angela Merkel's conservatives and coalition ally the Social Democrats in European polls on Sunday, exit polls showed, but the pro-business Free Democrats made gains before September's federal vote.

Merkel has failed to mobilize traditional supporters who are unimpressed by her handling of the financial crisis and the compromises she has made with the Social Democrats (SPD) to stay in power.

Support for Merkel's Christian Democrats (CDU) and its Bavarian sister party, the Christian Social Union (CSU), fell to 38.5 percent from 44.5 percent in 2004 although they were still the strongest grouping, ARD television exit polls showed.

The biggest gainers were the liberal Free Democrats (FDP) who won 11.0 percent, up from 6.1 percent.

The FDP is Merkel's preferred coalition partner but it is unclear if the two parties will be able to muster enough support in September to form a government, partly because the FDP is stealing votes mainly from the CDU, analysts say.

The Social Democrats (SPD), who have shared power with Merkel's conservatives in a loveless "grand coalition" since 2005, saw their vote slide to a historic low of 21.0 percent from 21.5 percent in 2004, according to ARD's forecasts.

"This is a hard evening for us. We have not managed to mobilize our voters," said SPD Chairman Franz Muentefering.

The SPD is lagging the conservatives by about 10 points in most domestic opinion polls and Foreign Minister Frank-Walter Steinmeier, who will fight Merkel for the chancellorship, has failed to inspire core SPD voters.

The financial crisis has dominated the European campaign and is likely to be the main theme in the September election.

Merkel has sought to sell economic management as a strength.

In the last few weeks there has been a major debate on state aid for struggling companies, such as carmaker Opel and retail group Arcandor with some conservatives arguing it is better in the long run to allow some companies to fail.

In the 2004 European election, the conservatives had benefited from a backlash against the SPD due to labor reforms introduced by former SPD Chancellor Gerhard Schroeder.

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