German EU vote points to Merkel-FDP alliance

By Madeline Chambers

BERLIN (Reuters) - Chancellor Angela Merkel's conservatives remained Germany's strongest party despite registering losses in European polls on Sunday, boosting her bid to retain power in September's federal election.

Merkel's favoured coalition partner, the pro-business Free Democrat party (FDP), was the biggest winner in Sunday's vote, pointing to a possible alliance between the two centre-right parties after the autumn election.

"If these results were repeated in September, Merkel could just about form a coalition with the FDP, " said Dietmar Herz, a politics professor at Erfurt University.

Support for the Social Democrats (SPD), who have shared power with Merkel's conservatives in a loveless coalition since 2005, languished at record lows in a blow to Foreign Minister Frank-Walter Steinmeier's hopes of becoming chancellor.

Merkel has failed to mobilise some traditional supporters who think she has moved too far leftwards in tackling the financial crisis.

In the last few weeks there has been a major debate on state aid for struggling companies, such as carmaker Opel and retail group Arcandor, with some conservatives arguing it is better in the long run to allow some companies to fail.

A stronger-than-expected showing for the sister party of Merkel's CDU, Bavaria's Christian Social Union (CSU), has bolstered German Economy Minister Karl-Theodor zu Guttenberg who has argued strongly against state bailouts of ailing companies.

"Guttenberg's cautious approach towards spending taxpayers' money on companies has paid off," said Rainald Becker a political commentator for SWR television.