(Reuters) - Chancellor Angela Merkel's conservatives stood neck-and-neck with the rival Social Democrats (SPD) in an election in the German state of Schleswig-Holstein, projections showed on Sunday, pointing to weeks of tough coalition talks to form a government.

German TV network ARD projected Merkel's Christian Democrats (CDU) at 30.6 percent, their worst result in the state since 1950, and the SPD at 29.9 percent based on exit polls after the voting stations closed at 6 p.m. (noon EDT). The result would give both parties 22 seats in the 69-seat assembly.

The unclear outcome in the northern state of 2.8 million people bordering Denmark, means a large number of coalition options possible, including a grand coalition of the two big parties or three-way governments involving smaller parties.

Perhaps the most likely of those is what Germans have dubbed a Danish traffic light coalition of the SPD, Greens and the South Schleswig Party (SSW), representing the state's Danish minority.

This is our goal, SPD lead candidate Torsten Albig told German public television. If that doesn't work we'll see what other coalitions are possible.

The environmentalist Greens stood at 13.6 percent, and the unconventional Pirates, who stormed onto the political scene last year, polled 8.1 percent, enough to enter their third straight regional assembly.

Merkel's resolute stance through the dramas of the euro zone crisis has left her personal popularity intact. But her national centre-right coalition has looked in jeopardy after a slump in public support for her junior coalition partners, the Free Democrats (FDP), due to their infighting and prickly leaders.

The FDP, who have dropped out of five state assemblies up and down the country, rebounded however to make it back into the Schleswig-Holstein assembly with 8.3 percent of the vote.

Merkel wants to win a third term in power in 2013 and press on with her drive to instill German-style budget discipline across the ailing euro zone. But she will likely have to find new allies for her Christian Democrats next year.

If her party proves the largest party in Schleswig-Holstein it would give the CDU vital second wind, at a sensitive time for the chancellor.

With national elections in France and Greece and local elections in Italy on Sunday, she faces a backlash across the continent to the austerity measures she has championed as the bitter pill necessary to solving the debt crisis.

Merkel must also contend with a vote next week in Germany's most populous state of North Rhine-Westphalia, frequently a barometer of future national voting trends, where the CDU trails the SPD.

An eventual grand coalition of the CDU and SPD in Schleswig-Holstein, where the themes of unemployment and high levels of state debt have dominated the campaigning, could point to a similar right-left partnership at national level in 2013.

The latest national opinion polls put the CDU on 36 percent and the FDP struggling to reach the 5 percent threshold required to get into the Bundestag, lower house of parliament.

The SPD and their Green allies have slipped to 25 and 12 percent, respectively, losing ground to the unconventional Pirates, who stormed onto the political scene last year and have proved a big hit with first-time voters, polling 11 percent.

Unemployment Germany Elections Storm