COPENHAGEN (Reuters) - Denmark's center-right Liberals received a mandate on Monday to form a minority government and signaled that the eurosceptic Danish People's Party (DF) was their most likely coalition partner.
Former prime minister Lars Lokke Rasmussen's Liberals, stung by their worst result in 25 years in last Thursday's election, failed in weekend talks to forge a majority coalition with the three other center-right parties, including the DF.
By contrast, the DF, which wants a British-style in-out referendum on Denmark's continued membership of the European Union, enjoyed the best result of its 20-year history and is now the second biggest party in parliament after the outgoing Social Democrats..
The DF has expressed no interest in leading coalition talks and has generally appeared coy even about joining any government in case the compromises it would have to make erode its support, though on Monday it struck a more positive tone.
"I am very aware the Liberals did not have the best election," Rasmussen told reporters after Queen Margrethe gave him the mandate to build a minority government.
"For me it is crucial to listen to the message of the election and that is that the core area of the welfare state ... needs to be improved," he said.
Spending more on welfare -- a DF demand which runs counter to the Liberals' promises -- is on the table, Rasmussen added.
Although the DF is a right-wing party that insists on physical border controls and immigration curbs, it also backs increased state spending on healthcare and the elderly.
Rasmussen said he would hold further talks with the three other center-right parties, beginning with the DF.
DF leader Kristian Thulesen Dahl said on Monday the new government's program was the key issue for his party.
"We're not nervous about assuming governmental responsibility, we'd do that of course. But the deciding factor is whether the content of the foundation of government is acceptable," he told reporters.
Technically, all options remain on the table -- the Liberals could form a minority government alone or with the two smaller center-right parties and pass legislation on an ad hoc basis.
It could also reach across the aisle to the center-left Social Democrats, an option that may become more likely if the current negotiations drag on a long time.
But a government that does not include DF would be a headache for Rasmussen because the party could hijack everyday legislation by demanding concessions to their own agenda.
In 2011, several months before the last election, a Liberal-led government imposed border controls in exchange for DF support for a financial package. The EU Commission complained and these were lifted by the next center-left government.
Today the new government will inherit a relatively healthy economy with growth predicted at around 2 percent this year and next year, in part helped by unpopular reforms carried out by the Social Democrats including cuts in unemployment benefits.
The central bank has warned of overheating in the labor and housing markets and said the government should tighten fiscal policy -- a recommendation at odds with the Liberals' promise of tax cuts and the DF's spending demands.
(This story corrects gender of DF leader)
writing by Sabina Zawadzki; Editing by Gareth Jones