Sweden called its first snap election for more than half a century in March after a far-right party helped defeat the center-left minority government's first budget in parliament on Wednesday.
Formed after a fractured September election that handed the anti-immigration Sweden Democrats the balance of power, Prime Minister Stefan Lofven's Social Democrat-Green coalition has been widely viewed as Sweden's weakest government in decades.
Shunned by mainstream parties, the Sweden Democrats have threatened to make Sweden effectively ungovernable unless the country adopts tough immigration policies like those of nearby Denmark, including a 90 percent cut in asylum seeker numbers.
Lofven blamed the four center-right parties which made up the previous, long-running Alliance government for giving the Sweden Democrats, who won 13 percent of the vote in September, an effective veto.
"They are allowing the Sweden Democrats to dictate the terms of Swedish politics," Lofven said.
Fresh elections would "let voters make a choice in the face of this new political landscape," he added.
Mattias Karlsson, acting leader of the Sweden Democrats, whose votes tipped the scale on Wednesday, said:
"Our ambition is to make sure this election campaign ... becomes a referendum for or against increased immigration."
The four-party Alliance said the political turmoil showed how the center-left coalition had been ill prepared to rule.
"What we have witnessed today is the train-wreck of the center-left cooperation," Liberal party leader Jan Bjorklund told a news conference.
The crisis has shaken the image of a country often held up as a paragon of political and economic stability.
The rise of the Sweden Democrats has threatened to break a decades-old agreement across the political spectrum on an open door policy for refugees. Former Prime Minister Fredrik Reinfeldt has called Sweden a "humanitarian superpower".
Sweden was the biggest per-capita recipient of asylum seekers and refugees last year, according to the Organisation for Economic Co-operation and Development.
Markets took the political storm in their stride. The crown strengthened on the day and the Stockholm all share index closed around 1 percent higher.
Analysts have warned a new vote will not necessarily produce a stable majority government of either center-left or center-right given the continued refusal of any of the three groups to cooperate with each other.
"It is very hard to see who will be the winners and losers from this," said Ulf Bjereld, professor in political science at Gothenburg University.
Few of the parties can feel confident ahead of the March vote. The Social Democrats have seen their support decline over years and the collapse of the government after just two months is not a sign of strength.
The Greens, in power for the first time, saw their share of the vote drop slightly in September from 2010 elections and could also be tainted by the failure of the coalition. How voters will react to the Sweden Democrats is also unclear.
"The Sweden Democrats may either be punished for creating chaos and disorder, or they could be rewarded for showing courage and standing up for their values," Bjereld said.
Furthermore, their charismatic leader, Jimmie Akesson, is on long-term sick leave and is unlikely to be back before the vote.
The Moderates, the biggest opposition party, are also effectively without a leader following former Prime Minister Fredrik Reinfeldt's decision to step down in March.
For the smaller parties in the Alliance, there is also the threat they will fail to cross the 4 percent threshold to get into parliament.
September's election reflected a split electorate, worried Sweden's cherished welfare state is failing after eight years of tax cuts under the Alliance but also unconvinced by the Social Democrats' tax and spend promises.
The election's only winners were the Sweden Democrats, who doubled their vote to become the third largest party, echoing recent poll successes for the far right across Europe.
In neighbours Denmark and Finland, anti-immigration parties are now among the three most popular in some opinion polls. In Norway, a rightist populist party is in the ruling coalition.
"The Alliance and the Social Democrats have brought this on themselves by not reaching a deal straight after the election," 75-year-old pensioner Stig-Ove said. "Now they have to find a way to bridge the political divide."
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