Swedish Social Democrat leader Stefan Lofven has said that he will try to form a new government after election win on Sunday but will not work with a far-right party which wants to slash immigration.
Lofven is expected to explore the possibility of a coalition involving the Greens and perhaps the former communist Left Party, based on an election that left him with a narrow win but gave no clear mandate to either side of the 349-member parliament.
The anti-immigration far-right Sweden Democrats celebrated large gains as the party won 12.9 percent of votes cast - more than doubling the 5.7 percent of votes won in the 2010 election.
After all voting districts tallied by Monday morning, the Social Democrat-led bloc won 43.7 percent of the vote while the ruling centre-right coalition, led by the Moderate Party, gained 39.3 percent.
With no majority reached, a complicated process of forming a government is expected as the centre-left pledged not to cooperate with the Sweden Democrats. The outgoing coalition has made the same promise.
Lofven, the prime minister-designate and former union leader, reiterated this pledge in his midnight victory speech.
Meanwhile, Sweden's long-serving finance minister Anders Borg said on Monday that he would leave party politics after the four-party Alliance government lost in a general election at the weekend to the centre-left.
Borg's departure is part of a change of guard at the Moderate Party, the biggest in the centre-right alliance.
The Social Democrats dominated Swedish politics during most of the 20th century and its single-party government ruled the country from 1994 to 2006 with support from allies.
The current prime minister, Fredrik Reinfeldt, who led the country during eight years of tax reductions and pro-market reforms, said he would hand in his resignation on Monday and also leave the leadership of the Moderates in spring.