By David Latona, Maria Martinez and Matthias Williams

MADRID/BERLIN The far-right Vox party lost seats in Spain's elections on Sunday, staving off the prospect of a first hardline nationalist-backed government since General Francisco Franco's dictatorship and pointing to limitations in the European far-right's bid for the mainstream.

Polls had predicted a win for the centre-right People's Party (PP) with Vox as the likely kingmaker but they failed to win a majority, leaving Catalan and Basque pro-independence parties holding the balance of power in a hung parliament.

Vox's share of seats fell to 33 from 52 despite campaign endorsements from a who's who of nationalist leaders, including Italy's Giorgia Meloni and Hungary's Viktor Orban.

The anti-immigration, anti-feminist Vox party fared especially badly in the region of Castile and Leon, where it has shared power locally with the PP and promoted policies that were problematic for many mainstream voters.

That included trying to change the rules of abortion clinics to make women be shown 4D images of the babies they wanted to abort and hear their heartbeats.

Sunday's result, which may keep Socialist Prime Minister Pedro Sanchez in power or herald another vote, suggests an electoral ceiling for some European far-right parties though their rise has worried leaders from Brussels to Berlin.

"The single most important issue across the population was related to the cost of living and Vox's strategy focused on identity issues," said Mujtaba Rahman, managing director for Europe of the Eurasia Group.

"The fight against LGBT rights, immigration and Catalan separatism didn't deliver the kind of returns Vox anticipated."

Support for right-wing populism in the euro zone's top four economies has been rising, as a cost of living crisis fuelled discontent with establishment politics and a backlash against the rising costs of a green transition.

So far, however, far-right parties have been mainly junior coalition partners or outright excluded from working with established groups even as some of their agenda may have nudged centrist politics to the right.

The pitfalls of joining hands with the far-right were underscored for Germany's main opposition leader Friedrich Merz on Monday when he rowed back from comments suggesting he could work with the Alternative for Germany (AfD) at a local level.

Merz, who leads the Christian Democrats (CDU), swiftly ruled out cooperation of any kind with the AfD after a backlash from within his own ranks.

Meloni, who last year took power as head of Italy's most right-wing government since World War Two, has softened her hardline rhetoric on immigration even as she builds an international alliance to tackle migrant arrivals.

French far-right leader Marine Le Pen has also softened her stance on some social issues, for example reversing a promise to ban same-sex marriage.

"The narrative about Europe lurching to the far right is overdone," Rahman said.

NO RETURN TO FRANCO

Supporters of the Socialist Party celebrated Vox's defeat by chanting "No pasaran", an anti-fascist slogan meaning "They shall not pass" used by the Republican faction in the Spanish Civil War (1936-39).

Le Pen had yet to comment the Spanish results by Monday afternoon though she had been quick to congratulate Vox after local election results last May.

The French government, on the other hand, welcomed the results: "Good news for Europe," said European affairs minister Laurence Boone. "Those who shout the loudest aren't always right: Europe remains dear to citizens."

Still, support for the far-right in several European countries is still robust. The AfD last month won a vote for a district leader for the first time and is course on to win three upcoming state elections in east Germany. Its rise has drawn concern from the domestic intelligence service about extremism.

In Belgium's Dutch-speaking Flanders region, hard-right Vlaams Belang are ahead in polling, winning over 24.6 per cent of voters surveyed by the public broadcaster VRT in May, six more percentage points than in the 2019 elections. So far they have been shut out at national and regional level.

"The populists offer simple answers to the complex reality of inflation, loss of living standards, and the increasing impact of climate change," said Heather Grabbe, non-resident fellow at the European think tank Bruegel.

But across Europe, the average vote share of right-wing populist parties has increased only modestly, from about 12% to 13% at the turn of the century to about 15% now, said Larry Bartels, professor at Vanderbilt University.

"The rise of populism is itself overblown, exaggerated by selective focus on places where right-wing populist parties have made big gains," Bartels said.

Vox has attracted voters with a slew of diverse grievances. It supports bullfighting, wants priority to be given to the use of Castilian Spanish over regional languages, and a focus on support for "the family as a basic institution".

Like Germany's AfD, Vox criticises policies to combat climate change and vowed to reduce low-emission zones and reroute bicycle and bus lanes to accommodate cars in cities where it is part of local governments.

Its leader Santiago Abascal attributed Vox's poor showing to a variety of reasons, blaming "manipulated polls" and what he cast as the PP's premature triumphalism.

But whatever the appeal of Vox's policies to some voters, for others the prospect of it sharing power was enough to make them stick with the mainstream left.

"I can't vote for the PP because I lived through Francoism, my father was in prison then," one told Reuters. "I could see myself supporting the PP but then there is Vox, which I cannot."

(Reporting by David Latona, Maria Martinez, Aislinn Laing, Angelo Amante, Gavin Jones, Belén Carreño, Michel Rose, Philip Blenkinsop; writing by Matthias Williams, Editing by Angus MacSwan)