German Chancellor Gerhard Schroeder casts his vote on Sunday. (Reuters)

Berlin, Sept. 18 (Reuters): Voters appeared to have forced Germany’s main political rivals into coalition with each other today, as exit polls showed conservative challenger Angela Merkel the winner but unable to form a Centre-Right alliance.

Projections by leading institutes broadcast on German television gave Merkel’s conservatives ? the Christian Democrats (CDU) and Christian Social Union (CSU) ? the biggest share of the vote at about 35.8 per cent and their preferred partners, the liberal Free Democrats (FDP), 10.3 per cent.

Chancellor Gerhard Schroeder’s SPD stood at roughly 33.7 per cent, its partners the Greens at 8.2 per cent and the new Left Party at 8 per cent.

With her conservatives the top vote-getters, Merkel, who grew up in the ex-communist east, seems likely to replace Schroeder, who has ruled Germany for seven years, to become Germany’s first female chancellor.

But the results will be a huge disappointment for her and the CDU. Without enough support to govern with the FDP, she will most likely be forced to share power with Schroeder’s SPD in Germany’s first “grand coalition” since the 1960s.

It is a grouping markets fear would doom her plans to push through aggressive reforms of Germany’s labour market and tax system, but one which up to a third of Germans say they favour.

“We had hoped for a better result,” Merkel said, conceding her preferred alliance of CDU/CSU and FDP did not appear to have a majority. “The election is over and now it’s time to form a stable government. And we in the CDU/CSU have the clear mandate for that. The CDU/CSU and FDP probably did not win enough (for a coalition with each other). But I will accept this mandate with all the power at my disposal.”

A provisional official result was not likely to be published until after midnight local time (2200 GMT).

However, Schroeder said after the election that he should remain Germany’s leader and form the next government. “I feel I have a mandate to ensure that in the next four years there will be a stable government in our country under my leadership,” he told ARD television.

The election had been seen as a watershed with far-reaching implications for Europe, where many countries are struggling to reconcile their cherished social welfare systems with the cut-throat demands of global competition.

German growth is now the slowest in the 25-nation European Union, unemployment went above the five-million mark earlier this year for the first time in the post-war era, and the deficit is set to breach EU limits for the fourth straight year.

Merkel had made the case that Germany needed to accelerate the structural reforms that Schroeder introduced in his second term to get back on track. She vowed to cut bureaucracy, ease rules on firing and cut payroll costs to reinvigorate Germany’s once-powerful economy.

But voters appear to have rejected that approach in favour of a more cautious path that financial markets fear will not bring the far-reaching change Merkel had promised.

“It’s not exactly a dream result for markets and will lead to disillusion on the stock market,” said Frank Schallenberger, equity strategist at LBBW. “Many market players had hoped for a conservative-led government pressing faster for reforms.

Another option that seems highly unlikely would be a so-called “traffic light” coalition between the SPD, its Greens partners and the FDP, the liberal party ? which, according to the exit polls, scored far better than expected. But FDP leader Guido Westerwelle ruled out such an alliance, as have the Greens.