A liberal incumbent and a conservative rival are pitted against each other in a surprisingly close showdown in Croatia's presidential runoff, held amid deep discontent over economic woes in the European Union's newest member.

The Sunday vote is seen as a major test for Croatia's center-left government, which is preparing for parliamentary elections this year under a cloud of criticism over its handling of the financial crisis.

Polling stations opened at 06:00 GMT across the Balkan nation and were to close 12 hours later.

In the first round of voting, Josipovic won 38.5 percent of the ballots, edging Grabar-Kitarovic with 37.2 percent. The runoff was called because neither Josipovic nor Grabar-Kitarovic captured over 50 percent needed to win outright.

A conservative triumph could shift Croatia back into right-wing nationalism, jeopardising relations with Balkan wartime rival Serbia.

Incumbent Ivo Josipovic, 57, is a soft-spoken law professor, pianist and composer who campaigned on a platform of constitutional change, including legislative veto powers for the largely ceremonial presidency.

He supports change in the electoral system and giving more power to the regions. He is backed by the Social Democratic Party, which leads the unpopular center-left government.

"I offer the country better organisation and reduction of the administration," Josipovic has said.

Opposition leader

Kolinda Grabar-Kitarovic, 46, is a former foreign minister and an ex-assistant to the NATO secretary general. Grabar Kitarovic is opposed to Josipovic's proposed constitutional changes and accuses him of doing nothing to stop the Croatian economic downturn.

She promises a swift economic revival and reversal of Josipovic's alleged soft stance toward neighbouring Serbia. The outspoken populist is backed by the conservative Croatian Democratic Union that ruled Croatia after it became an independent state in 1991.

"Josipovic is an accomplice in the country's economic hardships," Grabar-Kitarovic said. "He is just the flip side of the government's devaluated coin."

The presidency in Croatia is a largely ceremonial position, but the vote is considered an important test for the main political parties before the parliamentary elections expected in the second half of the year.

A victory for Grabar-Kitarovic - giving her a five-year term - would greatly boost the chances of her center-right Croatian Democratic Union to win back power. She would be Croatia's first woman president.

Source: Agencies