German voters gave Chancellor Angela Merkel a second term in an election on Sunday and a mandate to form a new government with the business-friendly Free Democrats (FDP) that is expected to cut taxes to boost growth.
The conservative Merkel has ruled for the past four years in an awkward "grand coalition" with her main rivals, the centre-left Social Democrats (SPD).
The election result frees her from the shackles of that partnership and allows her to form the centre-right coalition she has argued is best placed to nurture Europe's largest economy back to health following its worst post-war recession.
The next government faces major economic challenges. It will have to get a surging budget deficit under control, cope with rising unemployment and ward off a credit crunch as fragile banks rein in lending.
Together with the FDP, Merkel is expected to pare back the role of the state in the economy and extend the lifespan of German nuclear plants that are scheduled to be phased out over the next decade.
The parties, which last ruled Germany between 1982 and 1998 when Helmut Kohl was chancellor, will have to overcome differences on the size and timing of tax cuts in coalition talks over the coming weeks. Some analysts say, given budget constraints, such cuts will likely have to wait at least a year.
"We can really celebrate tonight, but afterwards we have a hard job ahead of us," Merkel, wearing a bright red suit, told cheering supporters.
Projections from ARD and ZDF public television showed Merkel's conservative bloc -- the Christian Democratic Union (CDU) and the Bavarian Christian Social Union (CSU) -- on 33.6 percent, down from their score of 35.2 percent in 2005, and their second-worst result in the post-war era.
But the FDP, a party which saw its support rise in the wake of the financial crisis, compensated for those losses, surging to a record high of 14.6 per cent and putting the centre-right over the top.
The SPD, which has been in government for over a decade, will join the environmentalist Greens and Left party in the opposition after plummeting double digits to 23.1 per cent, their worst result since the war.
Merkel's SPD challenger Frank-Walter Steinmeier, who served as her foreign minister for the past four years, called it a "bitter defeat". Projections showed the Greens on 10.5 per cent and the Left on 12.1 per cent.
Merkel was accused of running a cautious campaign short on substance and passion, but Germans have been content with her steady, low-key style and -- unlike voters in the United States and Japan -- did not seem keen for a change in leadership.
"This is a very good result for Angela Merkel, even if it is quite a weak result for her party," said Jan Techau, an analyst at the German Council on Foreign Relations. "She has been confirmed in her post, which is a big achievement in the depths of such a severe recession."
In addition to a soaring deficit, which is projected to rise to 6 percent of gross domestic product (GDP) next year, the new government will face a host of other tasks in the next months.
The future of 25,000 German workers at carmaker Opel will depend on Berlin's ability to push through a sale of the General Motors unit to Canadian car parts group Magna.
On the foreign policy front, a new coalition will have to renew a parliamentary mandate for German participation in an unpopular NATO-led mission in Afghanistan within months of taking power.
The German vote took place against a backdrop of heightened security after al Qaeda issued several videos last week threatening to punish Germany if voters backed a government that kept German troops in Afghanistan.
Germany has some 4,200 soldiers stationed there as part of a NATO-led force and all the main parties support the deployment, except the Left party.