BERLIN (Reuters) - Germans voted a new parliament in the state of Schleswig-Holstein on Sunday, with Angela Merkel's conservatives fighting to prevent a loss of local power to their Social Democrat rivals that could dent the chancellor's 2013 re-election hopes.
Merkel's resolute stance through the dramas of the euro zone crisis has left her personal popularity intact. But her national centre-right coalition is in jeopardy after a slump in public support for her junior coalition partners, the Free Democrats (FDP), due to their infighting and prickly leaders.
To have any chance of a third term in power and press on with her drive to instill German-style budget discipline across the ailing euro zone, Merkel must find new allies for her Christian Democrats (CDU) and end a dismal run at regional level for both her party and the FDP.
Schleswig-Holstein's voters looked almost certain to eject the CDU-FDP alliance that has run Schleswig-Holstein since 2009. First exit polls are due at 1600 GMT.
The question is whether the CDU can remain the largest party in the largely rural state of 2.8 million people on the Danish border and cling to power in a different coalition.
"I believe we will win, that we will fulfill our goal and be the largest party by a strong margin," said Jost de Jager, the CDU's lead candidate in Schleswig-Holstein.
If the party does win it would most likely strive for a "grand coalition" with the Social Democrats (SPD). But if the SPD become the largest party they will try to form a "Danish traffic light" coalition with the Greens and the South Schleswig Party (SSW), representing the Danish minority.
A CDU victory would give the party a vital second wind, at a sensitive time for the chancellor.
With national elections in France and Greece and local elections in Italy on the same day, the Chancellor faces a backlash across the continent to the austerity measures she has championed as the bitter pill necessary to solving the debt crisis.
Merkel could lose her ally Nicolas Sarkozy in France's presidential vote on Sunday with leftist leader Francois Hollande tipped to win, who has pledged to try and temper the austerity drive.
Merkel also faces a vote in Germany's most populous state North Rhine-Westphalia, frequently a barometer of future national voting trends, where the CDU trails the SPD by 7-8 percentage points.
Opinion polls for Schleswig-Holstein show the CDU and SPD neck-and-neck at 31 percent.
But the onus is on the CDU. Polls show SPD candidate Torsten Albig, charismatic mayor of the state capital Kiel, is twice as popular as his CDU opponent de Jager.
De Jager only became leader eight months ago after a scandal over his predecessor's relationship with a 16-year-old girl.
Battling to bring the FDP back from the brink is Wolfgang Kubicki, who looks to have secured a much larger share of the vote for his party - 7 percent - than it can hope for at national level. The party won just 1.2 percent in a vote in the state of Saarland in March and was ejected from the assembly.
"This was the most difficult election campaign I've ever fought... in the last weeks the mood here turned dramatically back in our favor. I think we will have grounds to celebrate," Kubici said after casting his vote.
An eventual grand coalition in Schleswig-Holstein, where the themes of unemployment and high levels of state debt have dominated the campaigning, could point to another grand coalition at national level.
The latest national opinion polls put the CDU on 36 percent and the FDP struggling to reach the 5 percent threshold required to get into the Bundestag (parliament).
The SPD and their Green allies slipped a few points to 25 and 12 percent respectively, losing ground to the unconventional Pirates, who stormed onto the political scene last year and have proved a big hit with first-time voters, polling 11 percent.