Portuguese business leaders on Monday called on José Sócrates, the prime minister, to rule out an alliance with the radical left after his centre-left Socialists lost their overall majority in Sunday’s general election.

“Any government involvement of parties to the left of the Socialists would be fatal to growth, investment and employment,” said Francisco Van Zeller of the Confederation of Portuguese Industry.

The warning highlights fears a weak Socialist government will lack the authority to deliver reforms needed to tackle Portugal’s economic problems.

Official forecasts released on Monday underlined the challenges ahead. Public debt and the budget deficit are projected to reach 74.5 and 5.9 per cent respectively of gross domestic product this year. The economy is expected to contract by more than 3 per cent.

“Even with an absolute majority, the Socialists made slow progress with reform,” said Francisco Sarsfield Cabral, an economic analyst. “There is now a serious risk that productivity and competitiveness will continue to decline and the gap between Portugal and the rest of Europe grow wider.”

Mr Sócrates, whose share of the vote dropped from 45 per cent in 2005 to 36.6 per cent, said he would talk to all parties and to Aníbal Cavaco Silva, Portugal’s conservative president, with a view to gaining parliamentary support for a viable government.

But the fractured political landscape that emerged from Sunday’s ballot has left him without any natural allies for his party, which will be at least seven seats short of a majority.

“The worst outcome for the economy would be if Mr Sócrates opts for popular measures with the aim of seeking a bigger majority in an early election in one or two years,” said Mr Sarsfield Cabral.

Smaller parties on the right and radical left made substantial gains in the election as support eroded for the Socialists and the centre-right Social Democrats, the parties that have dominated Portugal since democracy returned in 1974.

The Bloco de Esquerdo (Left Bloc), an alliance of former Maoists and Trotskyites who want to pull Portugal out of Nato, nationalise energy companies and increase taxes on the rich, doubled their number of deputies in the 230-seat parliament to 16.

The hard-line Communists won 15 seats, one more than before, giving the left-of-centre parties a comfortable majority. However, the antagonism between the parties and Mr Sócrates’ reluctance to damage his business-friendly credentials make any formal alliance unlikely.

Results declared on 99.6% of votes counted. (Four seats reserved for Portuguese citizens abroad.) Source: Portuguese Assembly of the Republic