By Michael Shields and Georgina Prodhan
VIENNA (Reuters) - Austria's pro-Europe, centrist coalition partners face weeks of hard bargaining to extend their seven years in power after voters gave them only a tiny combined majority while boosting the far right and a new liberal party.
Chancellor Werner Faymann's Social Democrats (SPO) offered talks with their conservative People's Party (OVP) allies to ensure that the two parties that have dominated post-war politics stay in power.
But conservative leader Michael Spindelegger was keeping his options open after both parties emerged bruised from their worst electoral showings since World War Two, together winning just 50.9 percent of the vote.
Both men said there could be no return to business as usual in the face of dwindling support that left the Euroskeptic and anti-Islam Freedom Party (FPO) breathing down their necks.
The victory, albeit slim, bucks a trend of EU voters throwing out governments over unpopular austerity steps imposed to calm investors since the financial crisis erupted in 2008.
The coalition parties in Vienna have so far avoided major structural reforms in favor of minor policy adjustments, eager not to stall the export-driven economy.
But the two big parties, already at loggerheads over tax, education and other important policy issues, need to bridge fundamental differences if they want to present a new agenda that will convince voters Austria is moving confidently ahead.
"MUCH TO DO"
"There is much to do, on the one hand to justify this result and on the other hand to build up more trust for the future," Faymann told ORF television.
Spindelegger said he was open to talks, but refused to rule out a coalition with the right-wing FPO and the new Euroskeptic party of Austro-Canadian car-parts magnate Frank Stronach - a combination that would be numerically feasible.
"This result is a wake-up call," he told ORF. "We can't simply go on as before."
Sylvia Kritzinger, head of the social science methods department at Vienna University, said she saw Spindelegger's comments as posturing to gain leverage with the SPO.
"I think that the grand coalition is going to continue its work although you can't really call it a 'grand' coalition any longer," she said.
The FPO, which seeks to end taxpayer-funded bailouts of weaker euro zone countries, boosted its share of the vote by almost four points to 21.4 percent.
"This is an incredible success. We are the election-night victors," said FPO leader Heinz-Christian Strache, 44, a polarizing figure who is popular with many young people but anathema to the political establishment that he loves to bash.
HIGH LIVING STANDARD
Critics say the coalition's lack of appetite for robust reform may over time jeopardize the high standard of living that most of Austria's 8.4 million residents enjoy.
The ruling parties had counted on their record in guiding Austria through the financial crisis relatively unscathed to win another term.
But unlike in neighboring Germany, where Chancellor Angela Merkel scored a comfortable victory on September 22 partly on the strength of the German economy, many voters felt hard done-by, despite the lowest jobless rate in the EU and economic growth well above the EU average.
A string of corruption scandals has also contributed to disenchantment with mainstream Austrian politicians.
The environmentalist Greens, likely to have joined the existing coalition parties in government had they failed to secure a majority, gained one point to win 11.5 percent.
Strache's FPO could not overtake the OVP due to competition from car-parts magnate Frank Stronach's new party, also Euroskeptic but without the FPO's anti-foreigner tone.
Team Stronach got 5.8 percent, ahead of the evening's other big winner, the new liberal party Neos, which got 4.8 percent - above the 4 percent threshold to enter parliament.
(Editing by Kevin Liffey)