The SPD's Heide Simonis (left) must try to form a new coalition

The opposition Christian Democrats (CDU) took 40% in Sunday's poll against 38.7% for Chancellor Gerhard Schroeder's Social Democrats (SPD).

But the CDU did not secure a majority in the northern state's assembly.

The SPD is expected to open coalition talks on Tuesday with a small ethnic Danish party, the SSW.

Economic woes

Analysts say unemployment contributed to the SPD's setback.

Schleswig-Holstein has one of the highest jobless rates in western Germany and last month the national jobless total rose above five million for the first time since the 1930s.

The SPD had appeared to be bouncing back in opinion polls since losing a series of state elections last year.

The SPD's Heide Simonis has been running Schleswig-Holstein since 1993. She is Germany's only female state leader.

Mr Schroeder, who hopes to win a third term next year, said: "The voters have created an unusual situation, but as democrats we respect the result".

The SPD could still govern the state in a coalition with the Greens and the SSW, which won two seats, analysts say.

The vote was a key test for the national SPD and Green coalition, which faces another crucial election in North Rhine-Westphalia in three months' time.