By Erik Kirschbaum
BERLIN (Reuters) - Germany's eurosceptic AfD party that has been siphoning votes from Chancellor Angela Merkel's conservatives could be dealt a major setback in a regional election on Sunday if it fails to clear the five percent hurdle in the city-state of Bremen.
Germany's final regional election of 2015 before a crowded vote calendar next year is also a key test for the recovering pro-business Free Democrats (FDP) -- who are eager to return to parliament in 2017 as a potential coalition partner for Merkel.
The Alternative for Germany (AfD), founded in 2013 opposing eurozone bailouts for states such as Greece, has recently been in decline, wracked by infighting and an east-west split. Afd registered up to 10 percent in national opinion polls in September, but has dropped to 4 to 5 percent in recent surveys.
Polls in Germany's smallest state put both AfD and FDP at the five percent threshold needed to win seats in the assembly.
The center-left Social Democrats (SPD), who have ruled the western city since 1946 with various coalition partners, are expected to come out on top again with around 37 percent of the vote and rule alone or continue with their Greens allies.
Despite popular Merkel's active campaigning in Bremen, her Christian Democrats (CDU) face another debacle and are at just 22 percent in polls -- just ahead of the Greens, projected to win 16 percent. The Left party are polling 8 percent.
But the conservative CDU, traditionally weak in Bremen, could take comfort if the AfD's winning streak is stopped. The party founded in 2013 to oppose euro zone bailouts of Greece has won seats in four of the country's 16 states since August.
The CDU has struggled to find a recipe to stop the AfD, vacillating between ostracizing and confronting a party made up of many former CDU members and regional conservative leaders.
The AfD's drift further right - and a ferocious internal battle over its appeal to far-right voters - has frightened away centrist voters, especially in western Germany. The Bremen AfD is led by a yacht designer, Christian Schaefer.
"The AfD needs a symbolic victory, in other words getting at least five percent, if it wants to show voters across Germany that it is indeed an established political force," said Gero Neugebauer, political scientist at Berlin's Free University.
"For the FDP, they'll be looking for more success in Bremen after their recent good run to keep the momentum going."
(Reporting by Erik Kirschbaum; editing by Ralph Boulton)