BERLIN (Reuters) — If Chancellor Angela Merkel still harboured any ambitions to push through reforms in the second half of her term, they will have died on Sunday after two state elections showed a clear shift to the left in German politics.

Merkel ally and conservative hard-liner Roland Koch suffered heavy losses in the western state of Hesse at the weekend in a vote that sent shock waves all the way to Berlin and could have major implications for policy in Europe's largest economy. The result in Hesse and the outcome of another state vote in Lower Saxony underscored how classic conservative policies advocating economic reform and tough law-and-order measures no longer resonate in Germany — or win elections.

That message will not be lost on Merkel as she gears up for the next federal vote in 2009 against a rejuvenated Social Democratic Party (SPD), with whom she shares power in an increasingly fraught "grand coalition".

"I don't see any more impetus for economic reforms. You can argue that was the case before these state elections but after them it is even clearer," said Gerd Langguth, a political scientist at Bonn University and biographer of Merkel. "We can expect Merkel to run a campaign that is light on reforms and heavy on social issues that appeal to the left."

In her 2005 election campaign, Merkel urged sharp cuts in taxes and an extension of the painful "Hartz IV" labour market reforms put in place by her predecessor Gerhard Schroeder. Foreign media saw her as a German version of tough British reform Prime Minister Margaret Thatcher, giving her nicknames like "Maggie Merkel" and the "Iron Maedchen".

But a shockingly narrow victory over Schroeder persuaded Merkel to tone down her economic plans and pursue a more modest "small steps" approach focused on budget consolidation and tweaks to the healthcare system. German industry groups and some CDU members are still making the case for tax cuts, more flexible rules on hiring and firing, and reduced social charges and other non-wage labour costs. Sunday's polls, however, served as a reminder heeding these calls and straying from a centrist course would be politically dangerous for Merkel and her Christian Democrats (CDU).

Josef Joffe, editor of German weekly Die Zeit, said the votes showed the German political system had moved far more to the "left" than where it was just a year ago — a development that is at odds with other big European countries like Britain, France and Italy where conservative parties are on the rise.

"Since all of German politics has shifted dramatically to the left, so will Merkel," Joffe told Reuters.

A day after Koch's setback, it was still unclear what kind of coalition would take power in Hesse, home to Germany's financial capital Frankfurt. Andrea Ypsilanti, a relative unknown SPD politician at the national level, who is best remembered within the party for her strong opposition to Schroeder's "Agenda 2010" reform drive, was the main beneficiary of Koch's losses and is the odds-on favourite to replace him.

In the northwestern state of Lower Saxony, moderate CDU premier Christian Wulff, who epitomises his party's new "compassionate conservatism", retained power, although like Koch he saw his support drop compared to 2003. But if there was one clear winner on Sunday, it was the Left party, a ragtag grouping of ex-communists and disaffected former SPD supporters, who entered the parliaments of both Hesse and Lower Saxony — the first time they have done so in large western states.