German voters gave conservative Chancellor Angela Merkel a second term on Sunday and allowed her to dump her centre-left coalition partners in favour of the pro-business Free Democrats (FDP), projections showed.
Her challenger in the vote, Social Democrat (SPD) Frank-Walter Steinmeier, appeared on television shortly after the first projections came out and conceded that his party had suffered a "bitter defeat".
Merkel has ruled for the past four years in a "grand coalition" with the SPD but can now end that awkward partnership and work with the FDP, a grouping she has said is better placed to help nurture Europe's largest economy back to health.
Together with the FDP, Merkel would be expected to push for tax relief and extend the lifespan of German nuclear plants that are scheduled to be phased out over the next decade.
A centre-right government last ruled Germany between 1982 and 1998 when Helmut Kohl was chancellor.
The projections from ARD and ZDF public television showed Merkel's conservative bloc -- the Christian Democratic Union (CDU) and the Bavarian Christian Social Union (CSU) -- on about 33 percent, down from their score of 35.2 percent in 2005.
But the FDP compensated for those losses, rising strongly to just under 15 percent, according to the projections, well above their 9.8 percent score of four years ago.
The SPD, on about 23 percent, suffered their worst result in the postwar era.
"The voters have decided and the result is a bitter day for German Social Democracy," Steinmeier said. There is no way of talking it up -- the result is a bitter defeat."
Projections showed the environmentalist Greens just above 10 percent and the far-left "Linke" or Left party near 13 percent.
DEEPEST RECESSION
Unlike voters in the United States and Japan, Germans did not seem keen for a change of leadership.
Many said they were content with the steady, low-key style of Merkel, Germany's first woman chancellor and only one to have grown up in the former communist east. About three in four voters say she has done a good job.
"This is a very good result for Angela Merkel, even if it is quite a weak result for her party," said Jan Techau, an analyst at the German Council on Foreign Relations. "She has been confirmed in her post, which is a big achievement in the depths of such a severe recession."
The election comes at a crucial time for Europe's largest economy, which is just emerging from its deepest recession of the post-war era.
The next government will have to get a surging budget deficit under control, and cope with rising unemployment and the threat of a credit crunch as Germany's fragile banks pare back lending.
The future of 25,000 German workers at carmaker Opel will depend on Berlin's ability to push through a sale of the General Motors unit to Canadian car parts group Magna.
On the foreign policy front, a new coalition will have to renew a parliamentary mandate for German participation in an unpopular NATO-led mission in Afghanistan within months of taking power.
The vote took place against a backdrop of heightened security after al Qaeda issued several videos last week threatening to punish Germany if voters backed a government that kept German troops in Afghanistan.
Germany has some 4,200 soldiers stationed there as part of a NATO-led force and all the main parties support the deployment, except the far-left "Linke", or Left party.