By Thomas Escritt and Sarah Marsh

BERLIN (Reuters) - Friedrich Merz's unprecedented first-round failure in the vote to make him German chancellor on Tuesday gave a boost to the far-right AfD, which just days ago was reeling from being officially labelled an extremist threat to democracy.

At least 18 members of the conservative leader's coalition with the centre-left Social Democrats initially chose not to vote for him, highlighting the fragility of a government formed not out of choice or compatibility but out of a consensus decision to shut out the rising Alternative for Germany.

The loveless coalition was the only two-party option left after second place in February's election went to the nationalist, anti-immigrant AfD, with whom all other parties refuse to work in an acknowledgment of Germany's traumatic Nazi past.

Its shaky confirmation, after a rapidly organised second vote, offers scant reassurance that it will be an improvement on its predecessor, a widely ridiculed and ineffective three-way SPD-Green-liberal rainbow government that lasted only three years.

"Merz is the first chancellor candidate to have failed in the first round," said a gleeful AfD leader Alice Weidel, calling for him to step down. "It shows you how weak this coalition of conservatives and the SPD is."

Even before Merz took office, conservative ratings have been falling as those of the AfD have risen.

The AfD's strength in eastern Germany has already pushed several states there to the brink of ungovernability as other parties refuse to cooperate with it.

FAR-RIGHT AFD THRIVES ON INSTABILITY

The secrecy of the ballot meant it was not clear which lawmakers had denied Merz their votes. His team had to appeal to the Greens and even the Left party - far-left heirs to former East Germany's communists with whom the conservatives also ordinarily refuse to cooperate - to allow a rapid second vote.

But such instability feeds a sense of unjust exclusion among supporters of the AfD, which on Friday was digesting the prospect of funding losses and legal difficulties after security services confirmed its designation as extremist.

"Trust in political institutions is being weakened further," said Manfred Guellner, head of pollsters Forsa. "The AfD is the winner from this debacle."The failure was also a personal setback for Merz, who was only elected Christian Democrat leader in 2022 after two unsuccessful bids in 2018 and 2021. A recent poll indicated that a third of his own voters see him as unfit to be chancellor.

"For the AfD, this sign of internal instability ... provides further opportunities to portray every other party as part of an establishment cartel that can only be swept aside by the far right," said Alex Clarkson, lecturer at King's College London.

"AfD leaders will hope to attract more national conservative-leaning voters frustrated with the compromises the CDU has had to accept."

Addressing parliament, AfD leaders appealed to voters already angered by Merz's decision to go back on election promises by agreeing to a trillion-euro debt package, with the Greens' backing, under pressure from the economic and geopolitical instability unleashed by U.S. President Donald Trump.

"This government starts in extreme instability and it will remain unstable," said AfD caucus leader Bernd Baumann.

(Reporting by Thomas Escritt; Editing by Kevin Liffey)