By Daniel Dickson and Simon Johnson
STOCKHOLM (Reuters) - Sweden's minority government looked certain to lose a budget vote on Wednesday as the anti-immigration Sweden Democrats flexed their political muscles - a move that may force Prime Minister Stefan Lofven to call a snap election.
The far-right group has held the balance of power since September's election and plan vote with the main opposition bloc on the budget.
The party has threatened to make Sweden effectively ungovernable unless Sweden imposes the kind of tightening on immigration policy that neighbouring Denmark has adopted. It wants Sweden to cut asylum seeker numbers by 90 percent.
"The Sweden Democrats' decision that they will vote against any budget that doesn't dance to their tune creates a totally new political landscape," Finance Minister Magdalena Andersson said in the budget debate.
"It fundamentally changes the parameters for how the country can be governed," she said.
Daily Dagens Nyheter said the government faced "Doomsday".
"Racism has taken Sweden hostage," it said in a headline.
Markets, however, were relatively calm with the crown strengthening against the euro after losses on Tuesday.
Riksbank Deputy Governor Per Jansson said the government crisis did not require any response from the central bank.
"This is far from being a problem for monetary policy and I don't see that this is a big problem for Sweden's economy," he told reporters after a speech.
If parties could not form a stable government in the longer term, however, "that could lead to concern in markets ... but you can't really see that now," he said.
LIMITED OPTIONS
Parliament will vote on the budget at about 1500 GMT and Lofven has said he will decide on what to do after that.
He has limited options, however, after the four-party centre-right opposition Alliance - which has refused to deal with the Sweden Democrats - rebuffed him in late-night talks on Tuesday.
"We may call snap elections later, when the constitution allows. We could also resign and there are other alternatives," Lofven told reporters after the meeting.
If he resigns, Lofven could still be asked by the speaker of parliament to form a new government, but it is unclear whether he could build a stable administration.
The most likely result is a snap election, which Lofven cannot call before Dec. 29 and which must take place within three months.
Analysts warn that a new vote would not necessarily produce a stable majority government of either the centre-left or centre-right.
September's vote revealed a split electorate, worried that Sweden's cherished welfare state is failing after eight years of tax cuts under the previous centre-right government but also unconvinced by the Social Democrats' tax and spend promises.
The only winners in the election were the Sweden Democrats, who doubled their vote to become the third largest party.
"The Sweden Democrats are totally prepared to vote 'no' again, even to a different budget if we are not given influence or if immigration policy is allowed to continue in the current direction," economic policy spokesman Oscar Sjostedt said.
Costs for asylum seekers including housing, language lessons and welfare allowances totalled 1.5 percent of the country's 2013 budget, with Sweden the biggest per-capita recipient of asylum seekers and refugees last year, according to the Organisation for Economic Co-operation and Development.
(Additional reporting by Johan Sennero, Johan Ahlander and Niklas Pollard; Editing by Louise Ireland)
