Merkel's conservatives set to hold Saxony, eurosceptics make breakthrough

German Chancellor Angela Merkel and Saxony State Premier Stanislaw Tillich (L), who runs as candidate for the Christian Democratic Union (CDU) in the upcoming Saxony state election, wave to supporters at an election campaign in Dresden August 29, 2014. REUTERS/Fabrizio Bensch

By Stephen Brown and Annika Breidthardt BERLIN (Reuters) - Chancellor Angela Merkel's conservatives were poised to cling to power in Sunday's election in the east German state of Saxony but new right-leaning rival Alternative for Germany (AfD) made a breakthrough by winning its first seats in a state assembly. Early results gave Merkel's Christian Democrats (CDU) nearly 40 percent of the vote, which would be their worst performance in a state they have run since German unification. The hardline Left and Social Democrats (SPD) were running second and third. The AfD, founded in early 2013 to oppose the euro zone bailouts, was set to beat all forecasts with 10 percent in the first of three eastern elections in a fortnight that could see the party establish itself as a force in German politics. "The AfD has finally arrived on the German party landscape," said Bernd Lucke, under whose leadership the eurosceptics won seats in the European Parliament in May. In Saxony it looked likely to overtake established parties such as the Greens and Free Democrats (FDP) - who dropped out of the state assembly in Dresden - and was on course for nearly as many seats as the SPD, Germany's oldest political party. CDU state premier Stanislaw Tillich would need a new partner to replace the FDP and is likely to form a coalition with the SPD, who are Merkel's junior partners in the federal government. Opinion polls show that would be Saxony's most popular option. Tillich put an end to weeks of speculation that he might team up with the AfD, which the CDU has attempted to demonise as a fringe movement that flirts with the far right. "We will TOGETHER look for a coalition partner with whom we can achieve something for the state - and the AfD is certainly not among them," the state premier told German television. However, the AfD's success in Saxony is likely to start a broader debate in the CDU about future cooperation with a party that was founded less than two years ago but is evolving rapidly from a single-issue eurosceptic movement into a law-and-order party that could chip away at Merkel's conservative hegemony. The AfD stands a chance of winning seats in two more eastern states, Thuringia and Brandenburg, on Sept. 14 and could poach more CDU votes. Public broadcaster ARD calculated that 35,000 CDU voters switched allegiance to the AfD in Saxony, more than those abandoning the FDP for the eurosceptic party. TAILWIND FOR AFD "The AfD has arrived. It has arrived in Saxony and, much more importantly, it has arrived in Germany," said Frauke Petry, the 39-year-old businesswoman who headed the AfD's campaign, adding that there is now a "tailwind" behind the party in the other states. Saxony, like much of the former German Democratic Republic (GDR), has struggled to catch up since unification. Incomes are lower, unemployment is higher - beyond the bright spots around Dresden and Leipzig - and polls say people are unhappier. Voters in Saxony, a state of four million people next to Poland and the Czech Republic, are unsettled by cross-border theft of farm machinery and trafficking of the drug crystal methamphetamine. Boosting the state police and improving education were hot issues in an election where the far-right German National Democrat (NPD) party looked set to scrape the 5 percent threshold required to keep it in the assembly. In contrast to Saxony, Merkel's CDU risks being booted out of office in Thuringia, despite a lead in opinion polls. In what would be a first at state level, the Left - which counts on a core of left-wing support in the former GDR - could seize control of the government of Thuringia in Erfurt if they can convince the SPD to be junior coalition partners. That would fuel speculation that the SPD could consider teaming up with the Left at the federal level for the first time to challenge 60-year-old Merkel in the 2017 national elections. In the third regional election, in the state of Brandenburg which surrounds Berlin, the SPD is expected to keep power at the head of a coalition with the Left. The CDU would not look kindly on its SPD partners in Berlin giving the Left a leg-up to power in Thuringia, and the CDU's deputy leader Peter Tauber said such a move would complicate cooperation between the two parties in the federal government. (Editing by David Goodman)