By Simon Johnson
STOCKHOLM (Reuters) - Swedes vote on Sunday in a tight election dominated by fears over asylum and welfare, with the populist, anti-immigration Sweden Democrats vying to become the biggest party in a country long seen as a bastion of economic stability and liberal values.
Far-right parties have made spectacular gains throughout Europe in recent years following a refugee crisis sparked by civil war in Syria and ongoing conflicts in Afghanistan and parts of Africa.
In Sweden, the influx of 163,000 asylum seekers in 2015 has polarized voters, fractured the cozy political consensus and could give the Sweden Democrats, a party with roots in the neo-Nazi fringe, a veto over which parties form the next government.
"Traditional parties have failed to respond to the sense of discontent that exists," Magnus Blomgren, a social scientist at Umea University.
"That discontent maybe isn't directly related to unemployment or the economy, but simply a loss of faith in the political system. Sweden isn't alone in this."
The center-left bloc, uniting the minority governing Social Democrat and Green parties with the Left Party, is backed by about 40 percent of voters, recent opinion polls indicate, with a slim lead over the center-right Alliance bloc.
The Sweden Democrats, who want the country to leave the European Union and put a freeze on immigration, have about 17 percent, up from the 13 percent they scored in the 2014 vote, opinion polls suggest.
But their support was widely underestimated before the last election and some online surveys give them as much as 25 percent, a result that would likely make them the biggest party, dethroning the Social Democrats for the first time in a century.
That could weaken the Swedish crown in the short term, but analysts do not see any long-term effect on markets from the election as economic growth is strong, government coffers are well stocked and there is broad agreement about the thrust of economic policy.
Sweden has flirted with populism before. New Democracy, founded by an aristocrat and a record producer, won nearly 7 percent of the vote in 1991 promising strict immigration policies, cheaper alcohol and free parking, before crashing out of parliament only three years later.
But if the Sweden Democrats get a quarter of the vote, it would be a sensation in a country described as a "humanitarian superpower" by then Moderate party prime minister Fredrik Reinfeldt in 2014.
It would also make them the biggest populist party in the Nordic region, topping the Danish People's Party, which got 21 percent in 2015, and trump the 12.6 percent for the far-right Alternative for Germany which swept into the Bundestag in 2017.
With an eye on the European Parliament elections next year, Brussels policymakers are watching the vote in Sweden closely, concerned that a nation with impeccable democratic credentials could add to the growing chorus of euroscepticism in the EU.
Sweden took in more asylum seekers per capita than any other country in Europe in 2015, magnifying worries about a welfare system that many voters already believe is in crisis.
Lengthening queues for critical operations, shortages of doctors and teachers and a police service that has failed to deal with inner-city gang violence have shaken faith in the "Swedish model", built on a promise of comprehensive welfare and social inclusion.
Sweden Democrat leader Jimmie Akesson has labeled the vote a choice between immigration and welfare.
He has also promised to sink any government that refuses to give his party a say in policy, particularly on immigration.
Mainstream politicians have so far rebuffed him.
But with some kind of cooperation between parties in the center-left and center-right blocs the only other alternative out of the current political deadlock, analysts believe Akesson may yet end up with some influence on policy.
With both options unpalatable to the traditional players, forming a government could take weeks.
Polling stations open at 0600 GMT and close at 1800 GMT, with exit polls set be published by Sweden's two main broadcasters around that time. Results from the vote count will become clear later in the evening.
(Editing by Helen Popper)