By Anneli Palmen
DUESSELDORF, Germany (Reuters) - Germany's most populous state, North Rhine-Westphalia (NRW), faces a snap election that could send shockwaves to Berlin and weaken Chancellor Angela Merkel's coalition partner after the local government failed to get its budget passed on Wednesday.
State premier Hannelore Kraft, head of NRW's minority government of Social Democrats (SPD) and Greens, had earlier said she would call a fresh election if the 2012 budget plans were not approved by the regional state assembly.
She had hoped to win backing for her budget from the Free Democrats (FDP) - part of Merkel's national coalition, but in opposition in NRW. But its long-standing objections were not overcome in time for the vote.
An election in the northwestern state of 18 million people, probably in May, could cause convulsions in Berlin.
Environment Minister Norbert Roettgen, a Merkel confidant, announced he would stand as the candidate for her Christian Democrats(CDU) in NRW. If he were to win and become state premier he would have to leave the cabinet, forcing a reshuffle.
Elections in NRW have had a destabilizing influence on national politics in recent years.
In 2010, conservative leader Merkel lost her majority in the Bundesrat, the upper house of parliament, when her local CDU ally Juergen Ruettgers was ousted as NRW state premier.
Five years earlier, a humiliating loss for the SPD in NRW, whose big cities and heavy industry for decades made it natural leftwing territory, prompted then-chancellor Gerhard Schroeder to call early national elections, in which Merkel managed to replace him.
"New elections in NRW will trigger greater caution because in the past, early state elections have often sent shockwaves to Berlin," said one stockmarket trader in Frankfurt.
"This causes uncertainty in the markets, and a wobbly federal government is the last thing we need."
Merkel played down the impact in Berlin, and said her party would put budget consolidation at the centre of its campaign.
FDP THE BIG LOSER?
But polls suggest the FDP, junior partners in Merkel's ruling coalition, may be ousted from the regional NRW assembly.
The FDP leader, Vice Chancellor Philipp Roesler, is already in a precarious position due to his party's dramatic drop in opinion polls and many commentators expect him to be forced out if the FDP performs badly in state elections this year.
Votes are already scheduled for Schleswig-Holstein and the western state of Saarland in coming months.
A weaker FDP could be awkward for Merkel as its members may take a tougher stand to boost their popularity, as recently seen with the party's decision to push for Joachim Gauck as German president against the chancellor's wishes.
The FDP's slide in opinion polls has been accompanied by growing skepticism in its ranks about Germany paying more money into bailouts for its euro zone partners.
NRW premier Kraft failed to win sufficient votes in the 2010 vote for a parliamentary majority with the Greens. Since then, the Greens have gained support, and the most likely outcome of an election seems to be a majority SPD-Greens government.
"We would like to form a government again with the SPD and Hannelore Kraft," said Green deputy premier Sylvia Loehrmann.
A surprise legal ruling by the state assembly late on Tuesday precipitated the situation.
This required the government to win every vote in the budget's second reading, which covers each ministry's individual plans. Previously, Kraft's government had understood that single defeats at the second reading would not matter, provided the whole package was approved at the third reading later in March.
The FDP had signaled it would back the budget at the third reading in return for concessions. However, the FDP objected to some individual parts of the bill, notably in the Interior Ministry budget, and voted against them, bringing down the government.
(Additional reporting by Tom Koerkemeier in Frankfurt and Alexandra Hudson; Writing by Madeline Chambers; Edited by Stephen Brown and Kevin Liffey)