Stockholm: Fredrik Reinfeld became Sweden`s first sitting centre-right prime minister to win re-election, but was deprived of a majority by the entry into Parliament of an anti-immigrant party.
Analysts had said before Sunday`s election that a hung Parliament, with Reinfeldt`s centre-right Alliance coalition having no overall majority, would unsettle investors and the Swedish crown was slightly weaker after the results.
A preliminary count of all 5,668 voting districts showed Reinfeldt`s coalition winning 172 seats in the 349-member Parliament and the anti-Islam Sweden Democrats 20 seats. The Social Democrat-led centre-left opposition was set for 157.
"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 was prepared to lead a minority government but 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," he told supporters at an election night party, rejecting any cooperation with the far-right Sweden Democrats.
But the reception from the Green Party was cool.
"In the current situation we have continued red-green cooperation," said joint Green Party leader Maria Wetterstrand, referring to the alliance with the Social Democrats.
Reinfeldt benefited from one of Europe`s strongest economic recoveries to become the first sitting centre-right prime minister to win re-election in a country that was ruled for much of the last century by the Social Democrats.
In the election, voters were choosing between Reinfeldt`s model of a leaner welfare state with more income tax cuts and privatisations, and an opposition platform that wanted the rich to pay more to fund schools, hospitals and care for the elderly.
The Social Democrats had their worst election in almost 100 years, with voters apparently backing the welfare reforms and tax cuts pushed through by the Alliance of Reinfeldt`s Moderate Party, the Liberals, Centre and Christian Democrats.
The big news of the night for a country which has 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 far-right party has come after it moved away from its skinhead roots and mirrors increases in backing for similar parties elsewhere in Europe.
The Sweden Democrats deny they are racist but both main blocs have ruled out cooperating with them.
"Today we have written political history together, I think that`s fantastic," Sweden Democrat leader Jimmie Akesson told chanting supporters.
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.
Umea University expert Svante Ersson said Sweden Democrat voters were often young men who felt ignored by society.
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 favourite destination for Iraqis after the US invasion.