Venezuelan strongman Hugo Chavez has suffered his first election setback in years, losing his two-thirds majority in the National Assembly.

Chavez’s "roller-coaster is going down," declared Carlos Ocariz, a mayor that is part of the anti-Chavez Coalition for Democratic Unity, according to journalist Ryan Mauro. "Ocariz and other Venezuelan opposition activists had reason to be hopeful. Hugo Chavez’s transformation of Venezuela into an anti-American harbor for drug traffickers and terrorists ran into resistance" in the national elections.

"The Venezuelan opposition took away the two-thirds majority in the National Assembly held by Chavez’s party," wrote Mauro, "winning 52 percent of the vote. All of Chavez’s dirty tricks to undermine his opponents failed to prevent voters from acting to arrest their country’s decline into dictatorship."

"Chavez, after suffering his worst setback at the ballot box since taking office in 1999, may seek to strengthen his grip on the economy and undermine opponents ahead of the 2012 presidential election," reported Charlie Devereux and Corina Rodriguez Pons in BusinessWeek magazine. "Chavez’s United Socialist Party of Venezuela, while securing 98 of 165 seats in National Assembly elections Sept. 26 after the redrawing of electoral districts, lost the two-thirds majority needed to pass key legislation by itself. The opposition took 65 seats and says it won 52 percent of the popular vote. Authorities didn’t release an official vote count."

"Predictably, Chavez declared victory," wrote Mauro, "because he still holds a majority in the National Assembly. He mocked the celebrations of the opposition, saying it was he who won. "It has been a great election day and we have obtained a solid victory: enough to continue deepening Bolivarian and democratic socialism. We need to continue strengthening the revolution!" he proclaimed on the Internet social network Twitter.

"The state-controlled news media," reported Mauro, "played an obedient tune, describing the election as showing the country as ‘red, very red.’"

"Chavez has experienced defeat just once before in 12 elections," reported Devereaux and Pons.

Thor Halvorssen, President of the Human Rights Foundation, said that although what the Venezuelan democratic opposition "pulled off is extraordinary" and "exceptionally significant," Chavez still has the power to bring Venezuela down the path to tyranny.

He may look to regain political momentum by increasing state control of the economy, boosting spending on social programs and cracking down on opponents, according to economic analysts at Barclays PLC and Goldman Sachs Group Inc.

"Already, the government has stated today that they have a three-fifths majority and that this is sufficient to pass an ‘Enabling law’ granting Chavez wide powers. The government of Venezuela manipulates rules, laws, and institutions as it sees fit," said Halvorssen.

It remains to be seen how Chavez will react to his loss, but he can be counted on to act in an undemocratic fashion. In 2008, he hamstrung the newly-elected mayor of Caracas because he was an opponent and hit him with steep funding cuts. He punished the city of Petare after they voted for one of his opponents by taking 16 garbage trucks away from them the following day.

"He has taken extreme measures to crush dissent," wrote Mauro, "which makes the opposition’s victory all the more impressive. A slight majority voted against Chavez even though his government dominates the media. He issued an arrest warrant for the president of Globovision, Venezuela’s final independent media outlet, forcing him to flee to the U.S. Chavez now controls 72 TV stations, 400 radio stations and 18 newspapers.

"The wave of support for the opposition was so large that these disadvantages were overcome," reported Mauro. "The Venezuelan economy is in tatters, with the GDP projected to decrease by 6.2 percent this year and inflation set to become the highest in the world, climbing above 30 percent. Chavez’s approval rating has fallen to 36 percent. Power outages have become common, and the sale of oil has dropped from 3.5 million barrels per day in 1998 to 2.5 million barrels per day. The oil industry is suffering from the nationalizing of foreign companies and cronyism that has led to strikes. The crime rate has soared, with more murders in 2009 than in Iraq or Mexico."

However, the battle is not over.

Unfortunately for the opposition, Chavez and his United Socialist Party still control the media and government apparatus.

"He has implanted Cuban advisors throughout the government and has assembled a 120,000-strong civilian militia, taking a cue from Iran’s Basiji," wrote Mauro. "The opposition’s gains are also limited by redistricting carried out last year to give more seats to poorer areas where he has more support.

"For instance," noted Halvorssen, "in Caracas the opponents of Chavez got 484,844 votes versus 484,103 of the Chavista party. And the ten seats get split: 3 for the winners and 7 for Chavez.."

Voter fraud remains an option for Chavez. Exit polls consistently showed Chavez losing a referendum on his rule in 2004, but the official result showed him winning in a landslide.

Former U.S. President Jimmy Carter was an observer at the election and announced there was no fraud, but an expert on election forensics named Walter Mebane from the University of Michigan disagrees.. A peer-reviewed study by Venezuelan academic Gustavo Delfino concluded the same, with him saying "it is by now beyond a reasonable doubt that the vote is rigged."

The opposition boycotted the 2005 parliamentary elections, saying they did not want to provide legitimacy to a rigged election. This played into Chavez’s hands, giving his party the supermajority in the National Assembly they had until now. Mebane also found evidence of fraud in the 2009 constitutional referendum that got rid of term limits, setting Chavez up to run for a third term.

"It is highly unlikely that he will leave power peacefully which is why he has disqualified the only candidate that has outpolled him, Leopoldo Lopez, and why he will do everything and anything in the next two years to get another term. He has already said it numerous times: he plans to stay until 2030," said Halvorssen.

"The fate of Venezuela also has consequences for the security of the West," noted Mauro. Colombia has publicly presented proof of Venezuela’s complicity with FARC, a narcotics-dealing Marxist terrorist group and the ETA Basque terrorists in Spain.

"The government is directly involved in drug trafficking and undercover investigations show that Chavez’s government is also harboring Hezbollah and Hamas," said Mauro.

Roger Noriega, a former U.S. ambassador to the Organization of American States, has publicly shown copies of secret Venezuelan government documents revealing that Chavez’s regime is collaborating with Iran on nuclear weapons. Noriega identified three facilities, including one guarded by Iranian personnel, located where Venezuela is believed to have uranium deposits.

"If his past is any indication, Chavez is scheming right now how to manipulate and maintain his grip on power," wrote Mauro. "The clipping of Chavez’s wings in the National Assembly is encouraging, but the democratic opposition’s battle is far from over.

"It’s not in Chavez’s nature to take this threat lying down," said Ray Walser, a Latin America analyst at the Heritage Foundation in Washington. "He will likely take a retaliatory step."

Henrique Capriles Radonski, a member of an anti-Chavez party and governor of Miranda state, said winning the popular vote will rouse the opposition ahead of presidential elections in 2012. The new assembly doesn’t convene until January and Capriles said Chavez may use the last three months of the outgoing assembly to pass laws by decree and weaken parliament.

"We need to keep our eyes peeled," he said. "We hope they will respect what the country voted for."

Chavez may use his control of the lame-duck congress to push through measures that strengthen his rule, said Alejandro Grisanti, a Barclays economist.

Grisanti said that in January, without a two-thirds majority, Chavez cannot change laws governing the central bank like his party did twice in the past year. His majority will also fall short of the three-fifths needed to grant Chavez powers to govern by decree.

"The next congress will be full of debates and conflict, but few laws will be passed," Grisanti said.

Venezuela’s flailing economy, the fastest inflation rate among 78 economies tracked by BusinessWeek and sporadic blackouts from under-investment in the nation’s power grid have caused Chavez’s approval ratings to fall below 50 percent this year, according to Datanalisis polling firm.

Also hurting the government’s approval rating are homicides that have more than tripled since Chavez came to power to a record 16,047 last year, according to the Caracas-based Venezuelan Observatory of Violence.

Still, the 56-year-old former paratrooper remains revered among many poor Venezuelans who benefit from free health clinics and subsidized food markets.