Stockholm: Sweden's three-month-old minority centre-left government has announced a deal with the opposition to sideline the anti-immigration Sweden Democrats, who hold the balance of power in parliament, and avert a fresh election.

Sweden's normally stable politics were thrown into turmoil in December when Prime Minister Stefan Lofven, who heads a coalition of his own Social Democratic Party and the Greens, said he planned to return to the polls after his budget was voted down by the centre-right opposition and the Sweden Democrats.

Partners: Deputy Prime Minister Asa Romson, Prime Minister Stefan Lofven and members of the centre-right Alliance announce the power-sharing deal in Stockholm on Saturday. Credit:AFP

The Sweden Democrats had threatened to bring down any government that did not curb rising immigration, and to turn a snap election - which would have been the first since 1958 - into a referendum on Sweden's liberal refugee policies.

The deal with the centre-right Alliance bloc extends right through the next parliament of 2018-22, setting aside differences with the aim of making sure that centrist parties hold a lock on power and shut out the far right.