A surge in support for the far right in two eastern German state elections alarmed mainstream Germany on Monday, but Chancellor Gerhard Schroeder said he found encouraging signs for his Social Democrats in the results.
Both Schroeder's SPD and the conservative Christian Democrats (CDU) lost votes in Saxony and Brandenburg, after planned cuts in jobless benefits brought tens of thousands of protesters onto the streets in the depressed ex-Communist east.
But after a string of big losses in earlier state elections, the SPD held on to power as the biggest party in Brandenburg and may even become junior partner in the new government of Saxony, which the conservatives ruled alone since reunification.
Schroeder said he saw the polls as a positive signal for key local council elections in North Rhine-Westphalia on Sunday and for a state assembly election in the state, the country's most populous, in May 2005.
"That makes us optimistic, for North Rhine-Westphalia too, it's going to give us an upward lift," said Schroeder, who won re-election two years ago and is expected to run again in two years.
With Sunday's results it has become less likely that the conservative opposition can achieve a two-thirds majority in the Bundesrat upper house even if they win the May elections - with such a majority they could have blocked any legislation.
"Things could have been worse for the Social Democrats," a Commerzbank research report said.
"Schroeder can draw some comfort from the fact that his SPD did less badly than polls had predicted four weeks ago," said Holger Schmieding from Bank of America. "Schroeder's position has become slightly more secure over the last few weeks."
The far-right National Democratic Party (NPD), which the government likens to the Nazis and tried to ban, won more than nine percent of the vote in Saxony, and the German People's Union (DVU) won over six percent of the votes in Brandenburg.
Schroeder said he was concerned by the far right's gains.
"That has to worry every democrat," he said.
Martin Gillo, economy minister in Saxony which has been dubbed the Silicon Valley of Germany, said he expected "that it'll become more difficult to attract foreign investors".