Germany is heading for political deadlock after the country's general election ended in an extraordinary neck-and-neck race between the two largest parties, writes Derek Scally in Berlin.
Initial results and exit polls last night give a narrow lead to the Christian Democrats (CDU) led by Angela Merkel with 35 per cent of the vote, six points lower than expected and well off the vote required for a coalition with the liberal Free Democrats (FDP).
As Chancellor Gerhard Schröder's Social Democrats (SPD) continued to gain late last night with 34 per cent of the vote, analysts suggested a "grand coalition" of CDU and SPD will be the likely outcome.
"The election is over and now it's about finding a stable government for the people," Mrs Merkel told the party faithful in Berlin. "It's clear that the CDU has a mandate and I accept that mandate to govern."
But an hour later, Chancellor Schröder made the same claim to victory.
"I feel endorsed to make sure for our country that in the next four years there will be a stable government under my leadership," he told ecstatic crowds in the SPD headquarters. "It is now about making sure that the reform and renewal of Germany continues without endangering social cohesion."
Several coalition scenarios emerged from the unexpectedly tight result. The most likely is a so-called grand coalition of centre-left and centre-right, similar to the government that ruled the then West Germany from 1966-69. The possibility of such a constellation was mentioned by both CDU and SPD politicians yesterday within minutes of the polls closing.
"The two main parties have been called by the people to talk with each other," said Peer Steinbrück, the man tipped to lead the SPD in such a coalition.
Another option, the so-called "traffic light coalition", of Social Democrats, Greens and Free Democrats (FDP), was dismissed by FDP leader Guido Westerwelle last night. Another coalition possibility would bring together the CDU and FDP with the Greens.
The CDU and FDP had called for a change of government and backing for another round of serious reforms were needed to tackle low growth and mass unemployment of over 11 per cent.
Mr Schröder asked voters for more time for his reforms - welfare cuts and reworked labour laws - to have an economic effect, warning that the CDU would kill off the concept of "solidarity" in German life.
A croaking foreign minister Joschka Fischer, lead candidate of the Green Party, said: "We can see that the SPD-Greens have lost their majority. But we can also see that the politics of social chill and ecological regression, this politics has no majority."
As the first round of coalition talks begin this morning, the political uncertainty in Europe's largest economy is likely to push down the euro on stock markets.
"Germany faces difficult times because the formation of a new government will be tough," said Thomas Straubhaar, head of the Hamburg-based HWWA economic research institute. "Whatever emerges will be comparatively unstable." Jürgen Thumann, president of the German Employers' Federation, said: "We always said that the reform tempo had to continue. Our fear with a grand coalition is that the two parties would only be able to reach agreement on the lowest common denominator."
The only thing all sides agreed on last night was that no one would talk with the Left Party, the new election alliance of breakaway SPD left-wingers and neo-communists, which attracted 8.5 per cent of the vote. "Today is a signal that the left in Germany has a real chance," said Oskar Lafontaine, lead candidate of the Left Party and one-time SPD leader. He is unlikely to play a role, however, after initial results showed he had failed to get elected in his home town of Saarbrücken.