Early results gave the Croatian Democratic Union (HDZ) and its likely coalition allies just over half of the 10 percent of votes counted.
Opinion polls leading into the election had suggested a strong showing for the HDZ and as first results flowed the nationalist camp cheered.
“I can say that the HDZ is the winner of these elections,” HDZ leader Ivo Sanader told national television.
“A future coalition is to be negotiated ... I am sure that we will make the first contacts with our coalition partners tonight,” he added.
Racan claimed it was too early to call the results, refuting the suggestion he had already been defeated.
“It's not over until it's over,” Racan told Reuters. Still, he added that if his party lost he would “congratulate those who will be able to form the government.”
The winning party will be charged with the difficult task of leading the country, ravaged by war in the early 1990’s, into the European Union. Croatia is expected to be invited to join the club by 2007.
But Racan warned that any new governing alliance would be unstable without his party, which devoted its time in office to the pursuit of EU membership.
Tudjman (R) died of cancer in
“During the past four years an important improvement in Croatia's democratic life has been made. Croatia is becoming a mature democratic country which deserves to enter the European Union,” he said.
The HDZ was the party that led the northern Balkan country to independence from Yugoslavia in 1991 only to lose power in the 2000 elections, little over a year after the death of war-time leader Franjo Tudjman.
Despite the party’s bid to embrace prospective EU membership and distance itself from a dictatorial recent history, many Croatians, as well as the significant Serb minority, are skeptical of the party's new image.
The issue of cooperation with The Hague-based UN war crimes court is another question mark hanging over the HDZ. The party refuses to admit any Croatian culpability for atrocities committed during the 1991-95 Serbo-Croat war.
Still, Croatians blame Racan for failing to provide jobs for the one in five unemployed in the country. He is also widely perceived to have been soft on punishing corrupt officials from the Tudjman era.