Voters handed the centre-left opposition a strong mandate on Sunday to overhaul the flagging economy before the former Yugoslav republic joins the European Union in 2013, throwing out Croatia's ruling conservatives.
The opposition bloc, known as Kukuriku ('cock-a-doodle-doo'), won 76 seats in the Adriatic country's 151-seat parliament, according to official results with 50 percent of votes counted.
The conservative HDZ, which has ruled for 16 of Croatia's 20 years as an independent state, won 47 seats and was roundly punished by voters for a string of corruption scandals and rising unemployment.
The main thing is they did not manage to humiliate us, HDZ leader and outgoing prime minister Jadranka Kosor said, conceding defeat.
If the results stand, 45-year-old former diplomat Zoran Milanovic of the Social Democrats (SDS) will be able to form a government without seeking coalition partners, but faces a huge challenge in turning around the Croatian economy.
He will need to act fast to trim state spending and avert a potential credit rating downgrade.
The biggest risk is a credit rating cut, said Zdeslav Santic, an analyst at Splitska Banka.
In the coming months they have to make sure that the new budget shows a fiscal consolidation and reassures foreign investors. This is simply a must.
Supporters scrambled to greet Milanovic as he arrived at the Kukuriku victory party, but the bloc's leaders showed little euphoria.
Obviously, they are aware of difficulty of our situation, of the hard work that lies ahead, said political analyst Nenad Zakosek.
HARD WORK AHEAD
Milanovic has told Croats they will have to work more, harder, longer to turn the economy around before the country of 4.3 million people becomes the second former Yugoslav republic to join the EU in July 2013.
Croatia broke away from Yugoslavia in a 1991-95 war, and has seen its economy boom over the past decade on the back of foreign borrowing and waves of tourism to its stunning Adriatic coastline.
But growth ground to a halt when the global financial crisis hit in 2009 and Croatia has been the slowest among central and south-east European countries to crawl back out of recession.
Unemployment stood at 17.4 percent in October and thousands of employees work without pay. Lack of liquidity has paralysed many local businesses and overall foreign debt has surpassed 100 percent of gross domestic product.
I have a decent pension but I look around me and I see poverty everywhere, 74-year-old pensioner Milan Grgurek said after voting in the capital, Zagreb. Whoever comes to power ... will have to carry out reforms.
Trust in the governing elite has also been hit hard by a string of graft scandals mainly involving the HDZ.
Investigations have landed former prime minister and HDZ leader Ivo Sanader in court, and spread to other senior party officials accused of running slush funds.
The anti-corruption drive under Kosor helped secure Croatia a date for EU accession in July 2013, but concerns remain over the parlous state of its economy.
Milanovic told Reuters this week that the state budget for 2012 would be in place by the end of March, in time to avert a credit downgrade.