Bavaria's Premier Guenther Beckstein expressed shock at the result
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Bavaria's ruling conservatives, the Christian Social Union, have suffered huge losses in polls, losing their absolute majority, final results show.
The CSU got just 43.4% in the state election - its worst result since 1954.
The result is seen as a blow to Chancellor Angela Merkel, whose Christian Democrats (CDU) are allies with the CSU nationally.
Two centre-right rivals made gains in Bavaria - the Free Democrats (FDP) and the Free Voters.
The CSU has enjoyed an absolute majority in Bavaria for 46 years.
The centre-left Social Democrats (SPD), partners in Chancellor Merkel's "grand coalition", failed to capitalise on the CSU's loss of support in Bavaria.
The SPD slumped to 18.6% - down from 19.6% in 2003.
The SPD's Frank-Walter Steinmeier - Germany's foreign minister - will challenge Mrs Merkel for the post of chancellor in national elections in September 2009.
He described the Bavarian result as a political "earthquake". The CSU had won 60.7% in the state election in 2003.
CSU leader Erwin Huber said it was "a black day for the CSU" and his colleague, state premier Guenther Beckstein, said the party would now have to "bite into the sour apple" and form a coalition.
The FDP has not ruled out forming a new governing coalition with the CSU. FDP leader Dirk Niebel said "we certainly won't say no," but added that the CSU must first invite his party to talks. He ruled out any "rainbow" coalition excluding the CSU.
Correspondents say the result is likely to make compromises in the national grand coalition even harder to achieve.
A senior CSU official, Heinz Spitzner, saw Bavaria's strict smoking ban as one of the main reasons for his party's debacle.
The German news website Deutsche Welle says losses incurred by the state-owned bank BayernLB and the scrapping of a super-fast train link to Munich airport contributed to voter dissatisfaction with the CSU.
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