Sweden's center-left Social Democrat leader Stefan Lofven emerged as victor in Sunday's general election after a voter backlash against tax cuts and trimmed welfare by a center-right government, but he fell short of a parliamentary majority.
The Nordic region's biggest economy and one of the few star performers in Europe now faces a weak minority government with a possible political impasse as the anti-immigrant far right emerged as the third biggest party to hold the balance of power.
Lofven's Social Democrats and two other opposition parties, the Greens and Left, garnered 43.7 percent of the vote, against 39.3 percent for Prime Minister Fredrik Reinfeldt's coalition. That means a government with limited clout to pass bills.
Lofven told supporters he would begin coalition talks with the Greens, but also reach out to other parties.
"We are in serious situation. We have thousands of people unemployed, We have school results that are declining more than in any other OECD country," Lofven said. "There is something that is breaking. Now Sweden has answered that we need a change."
A projection by the election authority showed that the three center left parties - who have not as yet created a formal bloc - won 159 parliamentary seats, short of the 175 need for a majority. The government coalition won 142 seats.
The projection is highly unlikely to change substantially as the final districts are counted.
The far right anti-immigration Sweden Democrats won 12.9 percent in the poll, and 48 seats. Despite holding the balance of power, other parties refuse to work with them.
"You can't avoid taking us into account if you want to run the country," Sweden Democrat leader Jimme Akesson told cheering supporters. "We are holding the absolute balance of power now."
Lofven, a former welder and trade union negotiator, now faces hard and protracted negotiations to form a government. While the Social Democrats are the biggest party, it was one of their worst electoral results in a century.
"It is clear that from a broader perspective that this is difficult for Sweden," said Swedish Finance Minister Anders Borg. "We go from having one of Europe's strongest governments to having a weak government power with considerable uncertainty about economic policy."
In a blow for the center left opposition, the Feminist Initiative Party got 3.2 percent, below the threshold for parliamentary seats.
A win for the center left in a weak minority government could also be another nail in the coffin for reform in the Nordics, where governments in Norway, Finland and Denmark are holding back on trimming their expensive welfare states.
A defeat for Prime Minister Fredrik Reinfeldt would rob the likes of Germany and the United Kingdom of a voice in the troubled bloc for fiscal prudence and reform. Lofven has campaigned for more growth and investment and higher taxes on companies and the wealthy in the European Union.
Under Reinfeldt Sweden lost much of its image as a socialist welfare state. The country's tax burden fell four percentage points, to 45 percent of GDP, under France's. Taxes on inheritance and wealth were lowered or abolished. More Michelin star restaurants than ever opened in Stockholm.
"These have been fantastic years where the Alliance have taken responsibility for Sweden," Reinfeldt told party supporters on announcing his resignation. "My hope is that the journey will continue, but it will be without my participation."
Many Swedes are worried that reforms under Reinfeldt have gone too far, weakening healthcare, allowing business to profit from schools at the expense of results and dividing a nation that has prided itself on equality into haves and have-nots.
Voters have been shocked by scandals over privately-run state welfare - including one case where carers at an elderly home were reportedly weighing diapers to safe money - and bankruptcies of privately run schools.
"We need to re-find our values, those that say we take care of each other, that it is not all about the rich getting it better," said Sofia Bolinder, playing with her young daughter in a playground after voting in the suburb of Skarpnack in southern Stockholm. Bolinder, in her 30s, said she voted for a party "on the left."