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The two parties, which ruled the state since 2009 in a centre-right coalition as at the centre, were voted out of power in elections held on Sunday and it looks likely that the opposition Social Democratic Party and the Green party will form the next government.
The conservative-liberal coalition's rout in the state poll will further weaken its position in the Bundesrat, the upper house of parliament, and will render it increasingly dependent on the support of opposition parties to pass key legislations.
The ruling parties' defeats in five state elections last year had robbed the coalition its majority in the chamber representing the federal states.
Chancellor Merkel's coalition government faces a crucial electoral test when the voters go to the polls in North Rhine Westphalia, the most populous German state next Sunday.
Even though the CDU retained its position as the largest political force in Schleswig-Holstein, its share of votes dropped by around one per cent from the last election in 2009 to 30.9 per cent, its worst tally in the state for more than five decades. The SPD gained five per cent to finish closely behind the CDU with 30.4 per cent, according to provisional official results released on Sunday night.
The Green party emerged as the third largest political force in the state by polling 13.2 per cent, up by around one per cent from the last election. The FDP's popularity with the voters plummeted by 6.7 per cent to finish at 8.2 per cent, even though not as bad as in three state elections earlier in which it failed to poll the minimum five per cent votes needed to enter a state parliament.
The SPD and the Green party together have 32 seats, three seats short of the majority of 35 seats needed to form a new government. But, they are in a position to form a government with the support of the Danish-speaking minorities' party SSW, which has three seats in the 69-seat state parliament in Kiel.
SPD's leading candidate Torsten Albig said he was determined to form the next government even with a one-seat majority in parliament. SSW leaders expressed their willingness to join a coalition with the SPD and the Green party. A coalition between the CDU, the FDP and the Green party is another possibility, but leaders of the Green party have ruled out a coalition with the CDU and the FDP.
Germany's youngest political party, the Pirate party, which campaigned on unrestricted internet access to all, polled 8.2 per cent votes and clinched its third parliamentary representation after winning the elections in Saarland earlier this year and in Berlin, last year.
The Left party, which entered the state parliament in Kiel for the first time in 2009, failed to cross the five percent threshold in yesterday's election.