By Erik Kirschbaum
HANOVER (Reuters) - Angela Merkel's conservatives appeared to be struggling to hold onto power in a German state election on Sunday against a center-left opposition showing it could yet mount a strong challenge to her chancellorship in September national polls.
In exit polls released after voting ended, Merkel's Christian Democrats (CDU) remained the biggest party in the swing state of Lower Saxony with 36 percent. The chief victors of the evening, however, appeared to be their Free Democrat (FDP) allies who defied doomsayers to win 10 percent.
But the Social Democrats (SPD) and Greens were also at 46 percent in the exit polls. Victory in Lower Saxony would boost their chances of depriving Merkel of a third term in the autumn despite a poor start by the SPD challenger Peer Steinbrueck.
"It's a neck-and-neck race and no one knows yet who will be the victor at the end of the night," said SPD candidate Stephan Weil, the mayor of state capital Hanover.
Neither of the two main parties needed success in Lower Saxony as much as the liberal FDP, whose survival in the local and national parliaments has been in doubt. They have polled under the 5 percent threshold for seats in either assembly.
Their projected result was twice that, and the song "Walking on Sunshine" blared from speakers at their election HQ in Hanover. As well as giving hapless FDP leader Philipp Roesler a reprieve, it may give Merkel a chance of repeating the center-right alliance for a third term rather than resorting to a "grand coalition" with the SPD, as she did from 2005-2009.
But that FDP success may have been at the cost of a decisive CDU result. Merkel's loyal Lower Saxony state premier, the half-Scottish David McAllister, was believed to have tacitly encouraged supporters to split their ballot to save the CDU's junior coalition ally from electoral oblivion.
"What is astonishing is that it looks like the CDU had a hidden campaign to get voters to use their second vote for the FDP so they could hold on to power," said politics professor Gero Neugebauer at Berlin's Free University."Yet the FDP didn't pick up all the votes lost to the CDU. As a whole the center-right bloc lost support in Lower Saxony."
The 42-year-old McAllister, son of soldier from Scotland who came to Germany with the British army, had been talked about as a potential successor to Merkel on the strength of his feisty campaign in a state with 6.2 million eligible voters.
Wolfgang Rausch, 56, a master craftsman, split his ballot between the CDU and FDP - the first for his CDU constituency candidate, the second for the liberal party.
"The CDU and FDP are better for Lower Saxony," he said.
CHANGE IS POSSIBLE
The Lower Saxony vote could also decide the fate of Merkel challenger Steinbrueck, whose unpopularity has been blamed for the SPD losing a once-commanding 13-point lead in the state.
The SPD was relieved at the result, with party chairman Sigmar Gabriel - a former state premier of Lower Saxony himself - saying with a smile as he clapped Steinbrueck on the back: "If we get a result like this when we mess up, we can do anything."
Steinbrueck said at party headquarters in Berlin he bore "shared responsibility" for a hit-and-miss campaign but that the SPD was clearly still in the race for September.
"This means a change of government and of power are possible this year," said the 66-year-old former finance minister.
The cliffhanger contest turned Germany's fourth most populous state, which is the size of the Netherlands and stretches from the Dutch border to the former East Germany, into an election battleground watched by the whole country.
Merkel made seven appearances in the campaign, aware that her party could not afford a defeat after suffering setbacks in the last 12 state elections and losing four states to the SPD.
The party's plight has stood in stark contrast to her own high approval ratings, boosted by her leadership role in the euro crisis where she defended Germany's economic interests.
The euro crisis did not play much of a role in the vote, with local issues like education, infrastructure and state spending dominating Germany's industrial and farming heartland.
"The CDU is doing a good job," said Peter Pietschmann, 68, a retired lathe operator, outside a polling station in the snow-covered state capital, Hanover. "Merkel's leading the country well, better than the SPD could."
(Reporting by Erik Kirschbaum; Additional reporting by Alexandra Hudson; Writing by Stephen Brown; editing by Ralph Boulton)
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