A far-right party holds the balance of power in Sweden after winning seats in parliament for the first time in elections yesterday.
The surge by the anti-Islam Sweden Democrats plunged the country into political disarray.
Prime Minister Fredrik Reinfeldt was seeking to become the first centre-right leader to win re-election after serving a full term in a Scandinavian welfare nation dominated for decades by the left-wing Social Democrats.
But the Sweden Democrats won 5.7% of the votes to gain 20 seats in the 349-seat legislature, according to preliminary results.
Final official results are expected later this week.
Reinfeldt’s four-party coalition won 172 seats, three short of a majority, while the left-wing opposition got 157 seats.
His coalition has been boosted by popular tax cuts and healthy public finances.
The 45-year-old prime minister said his government would stay in office and seek support from the small opposition Green Party, to avoid having to rely on the Sweden Democrats.
“I have been clear on how we will handle this uncertain situation: We will not cooperate, or become dependent on, the Sweden Democrats,” Reinfeldt said.
Green Party leader Maria Wetterstrand, who campaigned with the Social Democrats and the ex-communist Left Party, at first rejected the idea, saying she couldn’t envision supporting a government “that doesn’t have a climate policy”.
The result suggested a hung Parliament, because both blocs have ruled out governing with the Sweden Democrats, who want sharp cuts in immigration and have called Islam Sweden’s biggest foreign threat since the Second World War.
If Reinfeldt fails to solve the impasse he will be left with a fragile minority government that could be forced to resign if it fails to push crucial legislation through Parliament.
Sweden Democrats leader Jimmie Akesson said his party had “written political history” in the election.
“Party colleagues, we’re in Parliament!” he told jubilant supporters in Stockholm.
Large waves of immigration from the Balkans, Iraq and Iran have changed the demography of the once-homogenous Scandinavian country, and one-in-seven residents are now foreign-born.
The Sweden Democrats say immigration has become an economic burden that drains the welfare system.
But pre-vote polls showed Swedish voters were more concerned about unemployment - at 8.5 % in July – the economy and the environment than they were about immigration.
The Electoral Authority said 82 % of 7.1 million eligible voters turned out for the election.
The Social Democrats fell to a record low of 30.8 % in the vote, just marginally better than the 30 % won by Reinfeldt’s Moderate Party.
“This is an election without winners, and I’m saying that with a heavy heart,” said Social Democrat leader Mona Sahlin.
“It is up to Fredrik Reinfeldt now to show how he plans to run Sweden without letting the Sweden Democrats get a political influence.”