Angela Merkel's conservatives have a narrow lead in today's German elections but her centre-right alliance lacked a parliamentary majority, exit polls indicated as voting ended.
Polls by leading institutes broadcast on German television put Ms Merkel's conservatives - the Christian Democrats (CDU) and Christian Social Union (CSU) - the biggest share of the vote at 35.5-36 per cent and their preferred partners, the liberal Free Democrats (FDP), at 10.5 per cent - not enough to form a governing coalition.
Chancellor Gerhard Schroeder's SPD stood at 33.5-34 per cent, its partners the Greens at 8.5 per cent and the new Left Party at 7.5-8.5 per cent.
With her conservatives the top vote-getters, Ms Merkel, who grew up in the ex-communist east, seems likely to replace Mr Schroeder, who has ruled Germany for seven years.
But without enough support to govern with the FDP, Merkel could well 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.
A provisional official result will not be known until after midnight local time, although German television will progressively update projections of the outcome.
The election is being 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.
Ms Merkel has made the case that Germany needs to accelerate the structural reforms that Mr Schroeder introduced in his second term to get back on track.
German growth is now the slowest in the 25-nation European Union, unemployment went above the 5-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.
Ms Merkel, a 51-year old former physicist, has vowed to cut bureaucracy, ease rules on firing and cut payroll costs to reinvigorate Germany's once-powerful economy.
But without a parliamentary majority for her centre-right alliance, her ability to push through these measures will be limited and her own power curtailed.
As an outsider who soared to the top of her party by elbowing aside rivals, Ms Merkel could be blamed by powerful CDU barons for squandering a 20-point lead in opinion polls with a campaign that was criticised as lacklustre and gaffe-prone.