Germany's Social Democrats will propose holding new federal elections in autumn 2005 after suffering a heavy defeat in a regional election on Sunday, SPD party chief Franz Muentefering said.
"The chancellor and I agreed ... to propose seeking Bundestag elections in the autumn," Mr Muentefering said.
Television exit polls for the western German state of North Rhine-Westphalia (NRW) put the conservative Christian Democrats at 45.0 per cent, above the SPD's 37.5 per cent, and enough to win control of a region Mr Schroeder's party has ruled since 1966.
Once an SPD stronghold dominated by the coal and steel industry, NRW has fallen on hard times. Unemployment in the state, which borders on the Netherlands and Belgium and where one in five Germans live, recently pushed above the one million mark to a post-war high.
Voters here have blamed Schroeder's controversial labour market reforms, which included jobless benefit cuts, for their woes. The exit polls showed the Greens party, junior coalition partners to the SPD in the NRW government until now, winning 6.0 per cent.
The CDU's likely coalition partners, the liberal Free Democrats, stood at 6.0 per cent. That puts the combined CDU-FDP at 51.0 per cent, above the 43.5 per cent of the SPD and Greens. The result is likely to boost the chances that CDU leader Angela Merkel will run against Schroeder in 2006, raising the prospect of Germany's first woman chancellor.
By contrast, the election has ominous implications for the future of SPD and Greens cooperation. NRW was the last German state ruled by a coalition of the two parties and the result leaves the increasingly tense federal partnership in Berlin as the final "Red-Green" alliance. Within the SPD itself, the loss could also have far-reaching consequences.
The left-wing of the party, which opposed Mr Schroeder's welfare reforms, has been clamouring for a return to more traditional worker-friendly policies. A cabinet reshuffle is one possible outcome, with Economy Minister Wolfgang Clement and Finance Minister Hans Eichel both targets of party leftists.
German media reports have said outgoing NRW premier Peer Steinbrueck could replace Mr Eichel.
Mr Schroeder could also be forced to abandon plans to cut the basic corporate tax rate to 19 per cent from 25 per cent, a move designed to boost growth but strongly opposed by the left.