South Africa's governing African National Congress (ANC) has suffered its worst electoral setback since apartheid ended in 1994.

With 94% of the votes counted after Wednesday's municipal elections, the party has lost the key battleground of Nelson Mandela Bay to the opposition Democratic Alliance (DA).

The two parties are in a close fight for Johannesburg and Pretoria.

But the ANC is still in the lead nationally, with 54% of the vote.

The ANC has won more than 60% of the vote at every election since the end of apartheid more than two decades ago.

Unemployment and corruption scandals surrounding President Jacob Zuma have tarnished the ANC's image.

Named after ANC liberation hero and South Africa's first democratically elected president, the loss of Nelson Mandela Bay is a big blow to the party.

Many of the leaders of the struggle against apartheid come from the area.

DA leader Mmusi Maimane says his party has given voters a viable alternative to the ANC

The DA, which took 46.5% compared to the ANC's 41%, says it is in talks with other parties to form a coalition in the municipality on South Africa's southern coast.

The ANC has conceded defeat in Nelson Mandela Bay after initially saying it was going to challenge the result.

"Of course we have had setbacks in areas like the Nelson Mandela Bay but we are magnanimous in victory and also magnanimous in defeat because we are democrats," private broadcaster ENCA quoted ANC's chief whip Jackson Mthembu as saying.

DA leader Mmusi Maimane said the Nelson Mandela Bay had voted for change.

"I think that to me says that our message got through - it says our people heard us and South Africans still believe in a dream of a non-racial South Africa, South Africans still want our country to prosper," he said.

The BBC's Nomsa Maseko says as it looks like no party will win an outright majority in the economic hubs of Johannesburg or Tshwane, and coalition negotiations are already underway.