By Ray Furlong BBC Berlin correspondent

Schroeder has lost support inside and outside the party

But he said there was no alternative to his unpopular welfare and economic reforms which have been widely blamed for the result - the SPD's worst in the city since World War II.

"The process is necessary for this country and its people. We will have to explain that more carefully now. But we will keep the process going," he said ahead of a meeting of the SPD leadership in Berlin.

Mr Schroeder's words were a clear admission that the party's national standing had been instrumental in the Hamburg fiasco - at odds with earlier efforts to suggest that local issues had played the key role.

The Hamburg result mirrored the SPD's nationwide poll ratings, which are also at historic lows.

At the core of the party's problems is the state of the German economy. Unemployment remains stubbornly high, with four million people seeking work, after three years of nearly zero growth.

The government has broken with those people who wanted reforms by starting with them too late and doing them too half-heartedly Tilman Brueck German Institute for Economic Research

An increasing number of Germans do not believe that the Social Democrats, who have been in power since 1998, have the answers to these problems.

"The government has broken with those people who wanted reforms by starting with them too late and doing them too half-heartedly," says Tilman Brueck of the German Institute for Economic Research.

"But they've also broken with the people who wanted to preserve the status quo and were doing well out of the current system."

'Betrayal'

The reforms have bit hard. Cuts in welfare benefit, fees for visits to the doctor, and a freeze on pensions have been seen as a betrayal by many traditional Social Democrats.

The trades unions are again threatening to take to the streets to push for a change of course - and Mr Schroeder now faces growing pressure to reshuffle his cabinet, throwing out some of the least popular faces.

Opinion within the party is divided on whether this should take place around Easter time, to give it a boost in the European elections in July. Others favour waiting till the autumn.

For now though, the mood on this is as defiant as it is on the question of changes in policy.

The Chancellor will now have an even harder time running the country Bild newspaper

"The Chancellor has made it clear, everyone is staying in their job," said government spokesman Bela Anda on Monday.

Mr Schroeder's position as head of government is not threatened for now. The German system makes it extremely difficult to remove a sitting Chancellor.

But he has already announced his resignation as SPD leader, handing over to his trusted right-hand man Franz Muentefering later this month, at a special party conference that is expected to be stormy.

The idea is that Mr Schroeder will be free to concentrate on pursuing the reforms.

Winning touch

But to do that, he's got to get the party left off his back - which means the SPD must rediscover the winning touch.

It faces 13 other sets of state, regional and European elections this year, with the next big test is in Thuringia on June 13th.

"The Germans have used the first opportunity to punish the Chancellor and his team for their bungling over the last months," wrote the best-selling tabloid Bild in reaction to the Hamburg defeat.