By Noah Barkin

BERLIN (Reuters) - In an extremely tight German state election that seemed to produce few clearcut winners, there was no question who the biggest loser was - Angela Merkel.

Her Christian Democrats (CDU), led by local star David McAllister, had convinced themselves over the past week that they were on the verge of a come-from-behind victory to keep control of Lower Saxony, a vast agricultural and industrial region that resembles a U.S.-style swing state.

But on Sunday, they came up short, losing the state to the center-left Social Democrats (SPD) and Greens, who together won one more seat in the state assembly than the center-right.

In one fell swoop, the result gives the center-left a majority in the Bundesrat upper house of parliament, meaning the opposition can block major legislation from Merkel's government and initiate laws themselves.

It is a bitter defeat for the 58-year-old chancellor, even if she remains popular and a strong favorite to win a third term in a federal election eight months from now.

"I'm not going to pretend. After all the feelings generated by this election, defeat hurts even more," Merkel told a news conference in Berlin, standing alongside a gloomy-looking McAllister. "We are all sad today. Sad that it didn't work out."

The center-left will keep control of the upper house after the national election in September, even if Merkel's center-right coalition with the liberal Free Democrats (FDP) manages to hold onto power.

In the run-up to the vote, Merkel's room for maneuver will be limited, and the notoriously risk-averse German leader may take a more cautious stance on a range of policy issues, including the euro zone debt crisis.

"Barring some sort of emerging immediate threat to eurozone stability, we see little prospect of any major measures to address the fundamentals of the eurozone crisis being agreed and implemented this side of Germany's federal election," said Alastair Newton of Nomura.

MAC ATTACK

The vote is also a blow to the CDU's brightest new light. McAllister, a 42-year-old with a Scottish father, had ruled Lower Saxony since 2010 and became a protege of the chancellor, declaring on the vote's eve he was glad to be "Merkel's Mac".

There will be hand-wringing in the CDU about McAllister's not-so-subtle hints to supporters before the election that they use one of their two votes to boost the score of the FDP.

To keep power, McAllister needed the CDU's struggling FDP allies to make the 5 percent threshold to win seats in the state assembly. His message resonated with CDU voters, but perhaps stronger than he would have liked: the FDP ended up with a surprisingly strong 9.9 percent, largely thanks to CDU backers.

Its gains appear to have come at the expense of the CDU, which scored 36 percent, down 6.5 points from their last result in Lower Saxony in 2008 and well below the 40 percent-plus that opinion polls had forecast.

"The CDU has now seen very clearly how bad things can go when you campaign for a split vote, as it did for the benefit of the FDP," said Oskar Niedermayer, a political scientist at Berlin's Free University.

Merkel's CDU has now suffered defeats to the SPD and Greens in five states over the past two years, including in their longtime southern stronghold of Baden-Wuerttemberg and in Germany's most populous state, North Rhine-Westphalia.

Of Germany's 16 federal states, only three are now ruled by center-right coalitions like her federal partnership in Berlin. Continued...