State votes losses rattle German conservatives, Merkel firm

BERLIN (Reuters) - German Chancellor Angela Merkel dismissed criticism of her campaign on Monday after heavy losses in weekend state votes brought calls from some conservatives for a more aggressive approach before a September 27 election.

The conservatives have a double-digit lead over their main rivals, the Social Democrats (SPD), in national polls and Merkel looks likely to be re-elected.

But it is unclear if she will be able to form a center-right government with her desired partner, the pro-business Free Democrats (FDP), or whether she will end up in a second left-right "grand coalition" with the SPD.

On Sunday, Merkel's conservatives suffered a double blow when support slumped by more than 10 points for her Christian Democrats (CDU) in two states -- Saarland, on the French border, and Thuringia, in the former communist east.

CDU leaders in both states could be unseated by leftist coalitions although in a third vote, in eastern Saxony, the CDU looks set to retain power, probably in a coalition with the FDP.

Merkel told reporters she was pleased with some of the results and less satisfied with others.

"But it is clear there is no need to change our strategy," she said.

She will continue to argue that growth and jobs were crucial to helping Europe's biggest economy emerge stronger from the financial crisis, she said.

"I'm not going to get more aggressive, I'll put forward the arguments. I don't think the amount of noise directly affects voters' behavior -- especially undecided voters," Merkel said.

Conservatives are worried they may suffer a slump in support as they did in the final weeks of the 2002 and 2005 campaigns and some described Sunday's losses as a warning shot.

WAKE UP CALL

"This is a wake-up call for conservatives who believed an election victory on September 27 was a given," Wolfgang Bosbach, deputy head of the conservatives' parliamentary group, told Bavarian Radio.

Others called for a more distinctive, combative message.

Merkel, who has avoided controversy and focused on avoiding mistakes, has relied heavily on public approval of her management of the financial crisis.

But criticism is growing of her handling of talks with the U.S.'s General Motors over the future of carmaker Opel which has dragged on for months and reached an impasse.

Goldman Sachs economist Dirk Schumacher said the relatively poor CDU showing would unnerve conservatives and the FDP.

"The elections might create some dynamics, not least as many voters are still undecided," he said in a research note.

Another coalition with the SPD would stop Merkel from bringing in tax cuts and extending the lives of nuclear plants.

The SPD took heart from Sunday's results and argued the outcome gave them some tailwind.

"The results show there's something worth fighting for," SPD Chairman Franz Muentefering said. "We have a chance of winning. Nothing is certain but it's a chance."

But with only modest gains, the SPD still has a mountain to climb. And conservatives will jump on any state cooperation between the SPD, the Greens and the Left party -- descendants of former East Germany's communist party -- to warn of a "red wave" although the SPD has ruled out a federal alliance with the Left.

The Left, along with the FDP, were Sunday's biggest winners.

(Editing by Angus MacSwan)