Prime Minister Goran Persson was handing in his resignation Monday following the defeat of his Social Democrats in weekend elections, ending a 12-year era that showed the world that Sweden's fabled social model could be an engine of dazzling economic growth.

The victorious center-right alliance is promising only to tinker with the welfare state — but some believe their baby-steps toward lower taxes and more flexible labor rules could herald a deeper shift toward market liberalization.

Swedes on Sunday dealt the Social Democratic Party its worst election result since 1914 despite booming growth, opting for a four-party opposition bloc campaigning on a common platform for the first time.

The vote's big winner was prime minister-designate Fredrik Reinfeldt, whose Moderate Party rebounded strongly from a weak result in 2002 and scored its best parliamentary election since 1928 as Reinfeldt steered the party to the center.

"This is a historic change for Sweden, it's a real breakthrough," said Anna Maria Corazza Bildt, a local Moderate politician and wife of former conservative Prime Minister Carl Bildt. "People were tired of the Social Democrats."

Persson has portrayed the new Moderates as a wolf in sheep's clothing, hiding behind a softer facade while secretly plotting to dismantle the welfare system and favor the rich over the downtrodden.

Johnny Munkhammar, of free-market think tank Timbro, dismissed such ideas but saw the election result as a continuation of a gradual shift away from the Swedish nanny state introduced in the 1970s.

"There is no possibility in a Western European country to make drastic changes," Munkhammar said. "But after the new government has done what it promised in the first term it has to move on and do more things."

Persson's Cabinet is the first Social Democratic government since World War II to fall during a period of strong economic growth — 5 percent in the second quarter compared with the EU average of 2.8 percent.

Analysts said his biggest pitfall was not translating the growth into more jobs. While official statistics showed 5.7 percent unemployment, Reinfeldt noted that one in five Swedes is not working if you count people on sickness or disability leave or government job-training programs.

The opposition won the election by presenting a clear alternative to the Social Democratic minority government that has depended on the support of the small Left and Green parties since 1994.

Reinfeldt's alliance won 48.1 percent of the votes, compared with 46.2 percent for the Social Democrats and their two supporting parties. The mild-mannered 41-year-old will form a coalition government next month backed by a parliamentary majority of 178 seats in the 349-member Riksdag.

Persson's Cabinet is expected to stay in power until then in a caretaker capacity.

Reinfeldt's Moderates — the historical nemesis of the Social Democrats — led the way toning down their traditional conservative agenda. Shunning their traditional image of a party for the wealthy, they even portrayed themselves as Sweden's new workers' party, pledging to fine-tune the country's cherished welfare state instead of dismantling it.

"The non-socialist alliance has not fundamentally challenged the Social Democratic model," political analyst Tommy Moller said. "On the contrary it has sought a mandate to improve it."

The center-right alliance pledged moderate tax cuts, especially for low-income families, trimming unemployment benefits and selling off state assets in big companies. But experts expected Sweden's overall tax pressure to remain high and did not expect the big system change that Persson warned of in the election.

"Whether the changes will be significant enough to enhance Sweden's potential rate of growth and its labor market performance in any way remains to be seen," said Holger Schmieding, European analyst for the Bank of America in London.

The stock market reacted positively to the election outcome. The Stockholm stock exchange rose 1 percent, led by companies with large state holdings such as travel group SAS, telecom operator TeliaSonera and Nordea, the Nordic region's biggest bank.