Reuters International

By Johan Sennero and Simon Johnson

STOCKHOLM (Reuters) - Floundering and divided in the face of an asylum crisis and with record low voter support, Sweden's minority Social Democrat-Green government could disintegrate or be toppled well before its term runs out.

While Sweden is the region's economic star - growth was 4.1 percent last year - it needs urgent measures to solve a housing crisis, integrate refugees and boost its international competiveness to support its expensive welfare system.

But coalition fault lines are growing wider and any further tightening of asylum laws could be the last straw for the Greens. With the centre-left and centre-right both short of majorities, Sweden would face more years of policy deadlock.

"The longer the government has continued the more we have realized that there is a big distance between the parties," said a senior Green Party source.

The Social Democrats and Greens disagreed on issues like nuclear power, on how much to hike income taxes, while the rise of the anti-immigration Sweden Democrats has left parliament deadlocked.

The coalition's first budget was voted down with the a new election only avoided after the main, centre-right opposition Alliance agreed not to block the government's finance bills.

The immigration crisis pushed the coalition to breaking point to last year.

When 10,000 asylum seekers arrived each week in November, Sweden could no longer cope. But the Greens, the junior party in the coalition, dragged their heals over a u-turn on decades of generous policies.

New arrivals were being housed in tents and the Social Democrats gave the Greens an ultimatum - back tougher measures or leave the coalition, a government source said.

Green MPs only backed the deal by one vote after an emergency meeting and Vice premier Asa Romson of the Greens was close to tears at the announcement. Had the vote gone the other way, the Greens would have left the coalition, the source said.

Co-party leader Gustav Fridolin told Swedish radio the policies were "shit."

The government was dealt a further blow in April by the resignation of the Green Party housing minister over comments he had made comparing Israel's treatment of Palestinians to the plight of Jews in Nazi Germany.

In an open letter, the Green Party's leaders admitted many supporters questioned what values the party stood for.

Romson, however, dismissed talk the Greens could walk out of the coalition.

"That is not the discussion we have in the party," she said.

The political strains come amid major challenges for Sweden.

Extra costs for immigration - 50 billion crowns (£4.3 billion) over the next two years - will limit the government's plans to boost jobs and welfare.

The country needs to build 500,000 new homes by 2020. Productivity growth is slowing, sick leave costs are growing and Sweden is sliding downwards in international education tables.

This month the founders of music streaming service Spotify threatened to shift abroad citing the housing crisis, a shortage of programmers and a tax system that makes it hard to attract international talent.

Scarcely a quarter of Swedes think the coalition is doing a good job and more back Moderate leader Anna Kinberg Batra, whose party has embraced a tough line on asylum. Nearly two thirds of voters want the Green Party out of government, polls show.

"We seem to have got ourselves in a situation in Swedish politics where it is almost suspect to want to take power," said Ebba Busch Thor, the leader of the Christian Democrats, the smallest and most right-leaning member of the four-party Alliance.

"But if we have the chance to do what we think is better for Sweden, of course we will take it."

But short of its own majority in parliament, the Alliance would be reliant on support from the Sweden Democrats, with roots in the neo-Nazi movement.

Such is the stigma attached to the party in a country described by former Moderate Party Prime Minister Fredrik Reinfeldt as a "humanitarian superpower", many in the Alliance are afraid of a voter backlash.

"We are ready to take over, but that doesn't mean we are ready to negotiate or cooperate with the Sweden Democrats," said Jessica Polfjard, leader of the Moderate's parliamentary group.

Some kind of deal may yet come.

"The psychological and political difficulties of doing any sort of deal with the Sweden Democrats are still gigantic," said Nick Aylott, political science professor at Sodertorn University

"I suspect it will happen, but I don't think it will happen soon."

(Additional reporting by Alistair Scrutton; Editing by Toby Chopra)

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