German shares fell while Angela Merkel won elections

The euro tumbled and German shares slid on Monday after Germany's general election gave Angela Merkel's conservatives a victory so tight that Chancellor Gerhard Schroeder refused to concede defeat.

Fears that political deadlock would ruin prospects of major tax and labor market reform in Europe's largest economy drove the euro down 1 percent to a 7-week low against the dollar, while stocks in Frankfurt fell 2 percent at the start.

Preliminary results of Sunday's vote showed Merkel's conservatives scored 35.2 percent, less than a point ahead of the SPD and up to 14 points below her poll ratings before a campaign lacking charisma and ridden with gaffes, critics said.

The easterner Merkel will have the first shot at forming a government, but the ambitious reforms she pledged on the campaign trail could be sacrificed in the political deals she would need to cut to become Germany's first woman leader, Reuters reports.

"With a hung parliament, political uncertainty reigns supreme ... The result is a severe setback for reform hopes in Germany and beyond," said Bank of America's Holger Schmieding.

The likeliest outcome of Germany's most inconclusive postwar election seemed to be a "grand coalition" of Merkel's Christian Democrats (CDU), their sister party, the Christian Social Union (CSU), and Schroeder's Social Democrats (SPD).

But divergences between Germany's top two parties - notably over CDU pledges to free up the labor market and its opposition to Turkey joining the European Union - could prevent any accord before an October 18 deadline for the new parliament to sit.

Germany's main parties held emergency sessions on Monday to consider options. If all attempts at coalition-building fail, new elections - a first for postwar Germany - would beckon.

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