Xavier Bettel, the mayor of Luxembourg City, has been asked to form the next government of the tiny country, sidelining long-serving Prime Minister Jean Claude Juncker, the royal palace said.
Bettel, leader of the Democratic Party (DP) which increased its parliamentary presence after last Sunday's election, is set to form a government with the Greens and Socialists, the palace said. The three parties have already said they are ready to work together in a coalition.
If the talks are successful, it would be the first time since 1974 that a Luxembourg prime minister has not been chosen from the ranks of Juncker's Christian Social People's Party (CSV), which has ruled the country for all but five years of the post-war era.
The CSV lost three seats in the election, although remained the strongest party with 23 in the 60-seat parliament, while the DP added four seats and now has 13.
With the 13 seats of the Socialists and the six seats won by the Greens, the three parties would have a slim 32-seat majority and could form what has been called a "Gambia" coalition after the red, blue and green stripes of that country's flag.
Juncker, the EU's longest-serving head of government, has been a central figure in Europe's debt crisis, leading the Eurogroup of euro zone finance ministers until early this year.
His departure, after early elections forced by a scandal over abuses of power by the secret service, would be unlikely to herald radically different policies on Europe or on the economy, among the healthiest in Europe.
Luxembourg, with a population of just over half a million people between France, Germany and Belgium, is the one of the world's smallest countries, but is a vibrant financial centre.
It is second only to the United States for investment funds and is also a leading private banking hub.