The sun smiled on Vienna yesterday morning as President Thomas Klestil swore in Austria's new government in the baroque splendour of the Hofburg. But there was an unmistakable chill in the air as the unsmiling President gave each new minister the briefest of handshakes, making no effort to disguise his distaste for the duty he was obliged to perform.

The new coalition of conservatives from the People's Party and members of Jorg Haider's far-right Freedom Party has plunged Austria into international isolation and created a bitter divide in a country that prides itself on its social harmony. As the swearing-in ceremony began, the Israeli ambassador was on his way back to Jerusalem in protest at the Freedom Party's presence in government.

Austria's EU partners have frozen bilateral relations with Vienna and pledged to block Austrian candidates for all EU appointments. And the angry crowd gathered outside the Hofburg made clear their determination to make the new government's job as difficult as possible.

Stung by the intensity of the international reaction to the presence of Dr Haider's party in government, Austrians are at pains to point out that 73 per cent of the electorate did not vote for the Freedom Party. And although most Austrians regard their EU partners' decision to isolate Vienna as unfair, many are anxious about the prospect of the new political era.

After half a century of government by consensus, the new coalition faces opposition from the trade union movement, civil rights groups, most of the media and almost the entire international community. Yet the new Chancellor, the conservative leader, Wolfgang Schussel, declared that he hoped to govern "with enthusiasm and joy".

Dr Schussel is among his country's most unpopular politicians but, as a former foreign minister, he at least has the advantage of being familiar to the public. This is more than can be said for the five ministers from the Freedom Party, which has been something of a one-man band since Dr Haider became leader in 1986.

Dr Haider spent yesterday in his home province of Carinthia, where he will remain as governor rather than joining the cabinet, leaving a handful of nobodies to carry his standard in Vienna.

The new Finance Minister, for example, is Karl-Heinz Grasser, a 30-year-old economics graduate whose rise within the Freedom Party was stalled two years ago by a jealous Dr Haider. The most striking biographical detail about the Vice-Chancellor, Susanne Riess-Passer, is that she was born in Braunau, the birthplace of Adolf Hitler.

Dr Schussel has made much of the new government's commitment to the EU, despite the Freedom Party's record of hostility to the European project. But the coalition's programme demands tough preconditions for EU enlargement to the east, including a long transitional period before citizens of the new member-states are allowed to live and work elsewhere in the EU.

Austria will press for an enhanced EU defence identity and stronger links between the EU and NATO. If these goals are not achieved by the end of this year, the new government will consider ending Austria's military neutrality and joining NATO, although the final decision will be taken by the Austrian people in a referendum.

Immigration to Austria has effectively stopped, and the new coalition is determined that it will not resume in the near future. Seasonal workers who provide much of the staff in Austria's holiday resorts will be sent home as soon as they are no longer needed, and the government will consider the adoption of a Swiss system that limits such stays to nine months each year.

Although the Vienna stock exchange slumped when the government was sworn in yesterday, big business is licking its lips at the prospect of accelerated privatisation, lower labour costs and tough action against trade unions.

International disapproval of the new government could deter inward investment, and the effects of the diplomatic freeze remain unpredictable. But the biggest imponderable surrounds the role of Dr Haider, who is unlikely to remain silent while his Freedom Party colleagues sit in the cabinet.

Dr Schussel is confident that he can contain the right-winger, but most Austrian observers predict that Dr Haider will maintain a high profile throughout the life of the new coalition. When he judges the moment to be right, he is likely to pull the plug on the government and take his chances in a new election that could provide him with the prize he has sought throughout his political life, the leadership of his country.