STOCKHOLM Sweden's prime minister became the nation's first sitting center-right leader to win re-election on Sunday, but he was deprived of a majority by the entry into parliament of an anti-immigrant party.
Analysts had said before the vote that a hung parliament, with Prime Minister Fredrik Reinfeldt's center-right Alliance coalition having no overall majority, would unsettle investors and the Swedish crown was slightly weaker after the results.
With results in from almost all the 5,668 voting districts, Reinfeldt's coalition was set to win 172 seats in the 349-seat parliament and the anti-Islam Sweden Democrats 20 seats.
"If this outcome stands we will have a scenario that most Swedish voters wanted to avoid, that is that we have a xenophobic party holding the balance of power," said Ulf Bjereld, a political scientist at Gothenburg University.
Reinfeldt, who campaigned on a promise of more tax cuts and reforms to trim the welfare state, has said he is prepared to lead a minority government, but he repeated on Sunday that he would first approach the opposition Green Party for support.
"We have said that the biggest bloc should rule, and that is the Alliance," Reinfeldt told party workers at an election night party in central Stockholm.
He has benefited from one of Europe's strongest economic recoveries and would become the first sitting center-right leader ever to win re-election in a country that was ruled for much of the last century by the Social Democrats.
The Social Democrats saw their support slump after targeting voters who had suffered because of welfare reforms pushed through by the Alliance of Reinfeldt's Moderate Party, the Liberals, Center and Christian Democrats.
ANTI-IMMIGRANT PARTY IN
The big news of the night for a country which has long prided itself as being one of the most tolerant in Europe was the entry into parliament of the anti-immigrant Sweden Democrats.
The rise in support for the party has come after it moved away from its skinhead roots and mirrors increases in support for similar parties elsewhere in Europe.
The Sweden Democrats deny they are racist but both main blocs have ruled out cooperating with them.
Analysts say the party has found support among the unemployed, whose numbers rose during the global economic crisis. It has a strong base in the south of Sweden, where the number of immigrants is higher than the national average.
"Today we have written political history together, I think that's fantastic," jubilant Sweden Democrat leaderJimmie Akesson told his chanting supporters.
Jan Haggstrom, chief economist at Handelsbanken, said that even a minority Reinfeldt government could manage well and he saw little chance that the center-left opposition would link up with the Sweden Democrats on key parliamentary issues.
"We have such strong public finances..., it would take something really spectacular for people to start worrying ... and start selling Swedish government paper," he said.
INSPIRED BY DANISH PARTY
The Sweden Democrats have been inspired by the success of the People's Party in neighboring Denmark, which provides vital parliamentary support for the government there.
The party wants to curtail immigration and criticizes Muslims and Islam as un-Swedish. It already has many seats in local councils.
Sweden has been among the most welcoming of European Union countries to immigrants seeking asylum or refugee status, taking in people after the Balkan wars of the 1990s and becoming a favorite destination for Iraqis after the U.S. invasion.
Immigrants account for 14 percent of Sweden's population, just above the 12.4 percent average for northern Europe, according to United Nations figures.
In the election, voters were choosing between Reinfeldt's model of a leaner welfare state with more income tax cuts and privatizations, and an opposition platform that wants the rich to pay more to fund schools, hospitals and care for the elderly.
(Writing by Patrick Lannin, additional reporting by Simon Johnson, Adam Cox, Johan Ahlander, Johan Sennero, Elinor Schang, Sven Nordenstam, Bjorn Rundstrom; Editing by Noah Barkin)