By Patrick Lannin and Niklas Pollard
STOCKHOLM (Reuters) - Sweden's ruling centre-right faced the prospect on Monday of forming a minority government after losing its majority because of a surge in support for an anti-immigrant party.
Despite warnings of market jitters if there was no clear win for either main bloc, investors took the result in their stride, focussing on the fact that Prime Minister Fredrik Reinfeldt would remain in power, and on sound growth and public finances.
The anti-immigrant Sweden Democrats, which won their first parliamentary seats in the traditionally tolerant Nordic country and hold the balance of power, said other parties would now have to reckon with them.
But both Reinfeldt and the left have said they will refuse to work with the party, which says it wants a more responsible immigration policy but is called racist by opponents.
Reinfeldt, 45, had said he was prepared to lead a minority government if the result was inconclusive, but that he would prefer to secure a majority by luring the centre-left Green Party out of opposition.
However, the initial Green Party reaction was cool.
MARKETS CALM
The SWEDISH (SWMA.ES)crown by mid-morning was slightly firmer than its Friday close.
"... the strength of the economy (government finances and current account balances) and the economic policy framework give good immune defence against heightened political uncertainty/risks," SEB bank said in a note after the vote.
Sweden's economic performance this year has boosted the crown and with it Reinfeldt's political support.
From the preliminary count, Reinfeldt's Alliance looked set to win 172 of parliament's 349 seats, and the Social Democrat-led centre left 157 -- among them 25 Greens. The Sweden Democrats were on 20.
"If this outcome stands, we will have a scenario that most Swedish voters wanted to avoid -- that we have a xenophobic party holding the balance of power," said Ulf Bjereld, a political scientist at Gothenburg University.
Swedish newspapers saw the election as a dramatic shift.
"It is Monday morning and time for Swedes to find a new self-image," wrote the daily Svenska Dagbladet.
"A centre-right government without a majority, a wrecked Social Democracy, and a party with roots in far-right extremism holding the balance of power."
Green Party Secretary Agneta Borjesson told Reuters her party had not been contacted yet by Reinfeldt's Alliance:
"The option is, first of all, that all other possibilities are exhausted and there is total chaos. Then one would have to sit down and have a discussion, but we are not even in the situation where we can sit down and have a discussion."
But Sweden Democrat leader Jimmie Akesson, 31, was confident of having a say in the next government.
"We expect that the other parties see us as an equal partner and are ready to talk also with us," he told Swedish television.
LESS STATE, LESS TAX
Swedish 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, which ruled Sweden for much of the last century and installed the "Swedish model" of the welfare state, had their worst election in almost 100 years.
The Sweden Democrats have gained support by moving away from their skinhead roots, and their rise mirrors increases in backing for similar parties elsewhere in Europe.
In particular, they have been inspired by the success of the People's Party, which provides parliamentary support for the Danish government.
Analysts say the party, which wants to curtail immigration and criticises Muslims and Islam as un-Swedish, finds support among the growing number of unemployed. It is strongest in the south of Sweden, where the proportion of immigrants is highest.
Immigrants account for 14 percent of Sweden's population, above the 12.4 percent average for northern Europe, according to United Nations figures.
(Writing by Patrick Lannin, additional reporting by Simon Johnson, Adam Cox, Johan Ahlander, Johan Sennero, Elinor Schang, Sven Nordenstam, Bjorn Rundstrom, Rebecka Roos; Editing by Kevin Liffey)
