STOCKHOLM (Reuters) - Sweden's center-left leader risked alienating a major ally on Monday as he tried to forge a minority government with his defeated center-right foes on Monday after an election that saw an anti-immigrant party surge.
Stefan Lofven's Social Democrats and two other left-leaning parties garnered more votes than the outgoing center-right Alliance of Prime Minister Fredrik Reinfeldt in Sunday's election, but fell short of a parliamentary majority.
The far-right Sweden Democrats, which included neo-Nazi supporters among its early founders and wants to cut immigration by 90 percent, has emerged as the third-largest party after doubling their share of the vote to 13 percent. Its surge has shocked mainstream parties which all refuse to deal with it.
In a sign of how hard coalition talks may prove, Lofven quickly angered the Left Party after refusing to allow them in any new Social Democrat-led government, in an apparent move to appease center-right parties.
"The Social Democrats had a choice to rule toward the left or toward the right and they chose the right," Left party leader Jonas Sjostedt said. TT news agency reported he was visibly agitated and said "Social Democrats are making a huge mistake."
Jonas Sjostedt said he could still support Lofven from the outside, especially for the budget, only if the Social Democrats agree to restrict how private companies run state hospitals and schools, one of the most far-reaching reforms of recent years.
In the space of a day, Sweden's image has changed from that of a liberal, tolerant nation that excels in combining a generous welfare state with fiscal rigor to one facing political gridlock and overshadowed, like many other European countries, by fears about mass immigration and unemployment.
"A victory became a defeat," blared the editorial headline of Dagens Nyheter newspaper.
"Alliance government lost, but only populist right won," tweeted Foreign Minister Carl Bildt.
On Monday night, some 6,000 people gathered in central Stockholm to protest against the Sweden Democrats with chants like "end racism now" and "no racists on our streets".
Lofven, a former trade union boss who negotiated tough wage deals with some of Sweden's biggest companies during the global financial crisis, swiftly appealed to the center-right to work together with a new center-left government.
"The hand is there outstretched," Lofven told reporters.
"Now we are going to start talks with the Green Party and then continue with the Left Party and then we will make contact also with the Centre Party and the Liberal Party (of the outgoing Alliance coalition)," he said.
Asked if he excluded a coalition with center-right parties, he said: "I don't exclude anything. I'm not closing any doors."
But it could be hard for center-right parties to cooperate with Lofven after they flatly refused to before the election.
They are keen not to dilute the power of the Alliance, which in its eight years in power has slashed taxes - including those on income and wealth - and has increasingly allowed private firms to run Sweden's state hospitals and schools.
The left has been particularly critical of the role of these private firms after a series of scandals.
The three center-left parties won 158 parliamentary seats in total, well short of the 175 needed for a majority. The four-party Alliance, which includes Reinfeldt's Moderate Party, won 142 seats while the Sweden Democrats got 49 seats.
The Swedish crown, which had eased against the euro ahead of the vote on concerns about political stability, recovered on Monday to trade about 3 ore above Friday's close.
But Sweden, a triple A-rated economy that emerged from the global economic crisis in better shape than most of its European Union peers, faces an increased risk of policy stalemate. The worst case scenario would be for Lofven to lose a budget vote later this year, which could trigger another election.
Most analysts expect Swedish political pragmatism and its tradition of minority governments to ensure Lofven stays in power, though he will be forced to govern from day to day.
"A government can survive, but it's not clear how it can do much more than that," said Nicholas Aylott, associate professor of political science at Sodertorn University.
"That's the most likely scenario: a coalition of the Social Democrats and the Greens surviving as a minority government and trying to do deals with other parties on a more or less ad hoc basis, at least in the short term."
Sweden has a history of the center-left and center-right reaching deals on legislation. Under Reinfeldt, the center-right won the support of the Greens to undertake one of Sweden's most far-reaching liberalizations of labor migration rules.
In the mid-1990s, the Centre Party, which is part of the center-right coalition, cut deals with the Social Democrats.
Additional reporting by Johan Sennero and Anna Ringstrom; Writing by Alistair Scrutton; Editing by Tom Heneghan