German Chancellor Angela Merkel.

Germany - Chancellor Angela Merkel could be facing a major political challenge with Sunday's election in the eastern German state of Saxony possibly becoming a launching pad for the anti-euro Alternative for Deutschland to secure seats in parliaments across the country.

Chancellor Angela Merkel faces a fresh challenge to her traditional conservative political bloc from a new anti-euro party that is poised to enter a German state parliament for the first time.

Merkel's Christian Democrats (CDU) in the eastern state of Saxony have not ruled out forging a new coalition with the right-populist Alternative for Deutschland (AfD) following elections on Sunday.

This could set the stage for the AfD entering the parliaments of two other states, which are also due to go to the polls next month.

Leading in opinion polls, Saxon CDU Premier Stanilaw Tillich will likely have to find a new coalition partner after the election. Voter surveys point to his current ally, the pro-business Free Democrats, being shut out of parliament in the weekend ballot.

The CDU has dominated political life in Saxony, which includes the east's historic industrial heartland, since the state held its first post-Communist election in October 1990, shortly after Germany's reunification.

But after just failing to pass the 5-per-cent hurdle for securing seats in the national parliament in last September's federal election, the AfD now plans to turn Saxony into its new political stronghold in Germany.

The eurosceptic party is expected to win between 6 and 7 per cent of the vote on Sunday, about the same as what the party secured in the May European elections.

Founded in April in last year at the height of the eurozone debt crisis, the AfD's membership has drawn many of its members from the CDU, who are frustrated with Merkel's cautious conservatism and angry at her decision to help bail out cash-strapped southern European states.

“People are open to the idea of a new party,” Saxon AfD state secretary Uwe Wurlitzer told members of Germany's foreign press association.

Wurlitzer is confident that the momentum the AfD has built up in Saxony will help it to cross the 5-per-cent threshold in next month's elections in the eastern German states of Thuringia and Brandenburg.

“There is radical right-wing voter potential (in the east) that is also receptive to the AfD” said Manfred Guellner, who heads up pollsters Forsa.

Another option for Tillich is to turn to the left-leaning Social Democrats (SPD) to form a coalition in Saxony along the lines of Merkel's national alliance with the SDP in Berlin.

This would leave the opposition in Saxony in the hands of the parliament's second biggest bloc, the hard-left Linke.

Speaking to foreign correspondents, Tillich compared his choices on Sunday night when the votes roll in to the world football championships. “We have to wait for the referee to blow the whistle to mark the end of the game,” he said.

On Wednesday, Merkel once again ruled out a coalition with the AfD at the national level.

In addition to the SPD, which is going into the weekend election with about 15 per cent of the vote, Tillich also says he is not adverse to forming a coalition with the environmentalist Greens.

The two parties, however, would first have to bridge their differences on energy policy, in particular the future of brown coal mining, which is a pillar of the Saxon economy.

But on the question as to whether the Saxon CDU would consider teaming up with the AfD, Tillich simply says they are not in parliament.

Often compared with the American Tea Party, the AfD has sought to capitalize on concerns in the state about criminal activity on the border with neighbouring Poland and the Czech Republic.

This includes claims about the shipment of stolen goods such as cars and building machinery into Eastern Europe and the flood of illegal drugs across the frontier, notably Crystal Meth, into Germany.

The AfD's standardbearer in Saxony, Frauke Petry, has also called for German families to have three children to address the declining birthrate and for a debate on abortion.

The AfD's rise has also left the extreme-right wing National Democratic Party (NPD) struggling to remain in the state parliament with striking similarities between the two parties' election campaigns as they battle it out for the same voters.

“Secure the borders against cross-free criminality,” declares one AfD campaign poster on the streets of Dresden. “Fight criminality - secure the borders,” proclaims an NDP poster.

NPD officials see the AfD as “NPD Light”, according to Sunday's Frankfurter Allgemeine Zeitung.

“The NPD has stolen our campaign slogans,” said the Saxon AfD's legal advisor Michael Muster.

There are also signs that the CDU's campaign might have been losing momentum as it enters its final days.

Only a few months ago, analysts were speculating that after six years in the job Tillich might secure an absolute majority on Sunday.

But a poll released this week by German state broadcaster ZDF, support for the CDU dropped to 39 per cent from 40.2 per cent at the last election in 2009.