SWEDISH Social Democrat leader Stefan Lofven faces a tough task building a new government after an election left the centre-left short of a majority in parliament and handed the balance of power to a party that wants to slash immigration.

Prime Minister Fredrik Reinfeldt and his centre-right coalition government, which had been in power for eight years, resigned after winning fewer seats in parliament than the centre-left opposition.

The far right anti-immigration Sweden Democrats emerged as the third biggest party, winning 12.9 per cent of the vote. Despite holding the balance of power, other parties have refused to work with them.

Economic analyst Robert Bergqvist said: "Sweden is waking up to a new political landscape.

"Political authority and stability will be determined by the potential for informal cross-bloc cooperation and by inter-party agreements and resolve to isolate the Sweden Democrats."

Mr Lofven, a former welder and trade union negotiator, said he would begin coalition talks with the Greens but also reach out to others.

The centre-left Social Democrat, Green and Left opposition - not currently a formal bloc - took 158 seats in parliament, short of the 175 needed for a majority.

A minority left-of-centre government with an anti-immigration party that usually votes with the right-leaning parties holding the balance of power would be a unique parliamentary situation in Sweden. It is likely to have limited clout to pass Bills and could even result in political deadlock.

Mr Lofven hopes to entice members of the outgoing four-party centre-right Alliance to co-operate with him. They have so far ruled out such a move but that may change in the face of the strong performance by the Sweden Democrats.

Independent liberal daily paper Dagens Nyheter said the Sweden Democrats could regularly vote down Bills by a Social Democrat-led government.

It also said it would be difficult for centre-right parties to cooperate with the new government.