Chancellor Gerhard Schroeder and his conservative challenger Angela Merkel each claimed they should lead Europe's biggest economy after a cliffhanger general election left Germany in political limbo.

Merkel's opposition Christian Democrats appeared to have scratched out a narrow victory over Schroeder's Social Democrats in Sunday's election but crucially failed to secure a ruling majority.

Schroeder and Merkel both insisted they had each won a mandate to form the next government.

Both leaders were to meet with their party officials on Monday to begin intense negotiations to find coalition partners.

Provisional official results gave Christian Democrats 35.2 percent of the popular vote, possibly its worst result in the post-World War II period, and only narrowly ahead of the Social Democrats (SPD) at 34.3 percent.

That equates to a three-seat advantage for the Christian Democrats with 225 seats to 222 for the SPD, but both figures are well short of the number required for a ruling majority.

Merkel's intended coalition partners, the pro-business Free Democrats, tallied a surprisingly strong 9.8 percent, but still not enough for her to form the center-right majority she said she needed to rejuvenate the stalled economy and help the 4.7 million jobless back to work.

Nevertheless, Merkel said she had the upper hand and would negotiate with all the major parties with a view to creating a coalition.

But the charismatic Schroeder, 61, refused to concede defeat and insisted he should serve a third term as the country's leader.

The results mean the two biggest parties may be forced into an unwieldy grand left-right coalition -- a prospect Merkel has labeled a recipe for gridlock.

Schroeder said his party, boosted by a result that exceeded most expectations after they had trailed by a double-digit margin for much of the campaign, would never enter into a coalition under Merkel.

Schroeder was counting on persuading the Free Democrats (FDP) to join his Social Democrats and the Greens, his current junior government partners, thus forming a so-called traffic light coalition, named after the party colors red, yellow and green.

But FDP leader Guido Westerwelle, recognizing his role as possible kingmaker, vowed not to abandon Merkel in favor of Schroeder.

The FDP's result made it the third strongest party.

The 8.1 percent score for the Greens was better than forecast but not enough to save the government in its current form.

Meanwhile a new alliance of Social Democrat dissidents and former communists known as the Left Party garnered 8.7 percent, effectively robbing the mainstream parties of key support.

A three-way left-wing coalition featuring the Social Democrats, the Greens and the Left was ruled out by each of the parties, mainly due to the bad blood with the Left Party's chief candidate Oskar Lafontaine, a former SPD leader and finance minister who resigned early in Schroeder's reign.

Merkel, too, refused to negotiate with the far left, saying she planned to "talk to all political parties, except the Left Party" in her attempts to form a governing coalition.

The final result of the election will not be known until October 2 when voters in a district of the eastern city of Dresden cast their ballots.

The election in Dresden, which was delayed due to the death of a neo-Nazi candidate, accounts for two, or possibly three, seats.

Schroeder forced through the election a year ahead of schedule in an attempt to obtain a fresh mandate for his controverisal economic reforms.

Merkel, a former physicist from communist East Germany, campaigned on a message that only the Christian Democrats and the FDP could drive down a crippling unemployment rate of 11.4 percent and get the moribund economy moving again.

Germany's European partners have long hoped for a strong economic recovery to help propel growth on the continent.

But analysts said the election result showed that voters were unwilling to stomach the harsh medicine of economic reforms needed to get the country back on its feet.

The political uncertainty meant there would be no economic turnaround in the near future, they concluded.

Around 79.6 percent of the 62 million eligible voters turned out to vote, slightly higher than in 2002, according to ZDF public television.

PHOTO CAPTION

German Chancellor Gerhard Schroeder celebrates after first exit polls in Germany's general election at the SPD party headquarters in Berlin September 18, 2005. (Reuters)