Yesterday, New Mexico Sen. Pete Domenici announced that at the end of his current term (expiring in January 2009), he will retire.

The announcement opens up another Republican-held Senate seat as the 2008 election approaches — and it will generate new headaches for Republicans, already facing the prospect of losses in the Senate, who would no doubt have liked to run the incumbent, even given his alleged involvement in the firing of Albuquerque U.S. Attorney David Iglesias, for a sixth term.

It also raises the prospect of Republicans having to fight hard to hold another seat in a distinctly purple state — something that National Republican Senatorial Committee chairman Sen. John Ensign has been keen to avoid.

New Mexico went to President Bush in the 2004 election, but by less than 6,000 votes. It went to the Democrat in each of the three previous presidential elections (in 2000, to Al Gore by just 300 votes). The state has one Republican Senator (Domenici) and one Democrat (Sen. Jeff Bingaman). Republicans hold two of the three U.S. House seats representing the state, but Democrats hold majorities in both the state house and senate, and, crucially, all but one statewide office — the most important of which is the governorship, held by Democrat Bill Richardson, currently running for president and carrying a 64 percent approval rating, according to September numbers from Survey USA.

Richardson’s leadership of a resurgent Democratic Party in his own state, and across the West, will be a concern for Republicans looking at the Senate race. While he has no plans to enter it (in September, he called the possibility he might run “wishful thinking”), his strong backing of former New Mexico Attorney General Patricia Madrid last year did help the gaffe-prone Democrat come within less than 900 votes of ousting Rep. Heather Wilson — herself now a candidate to replace Domenici.

Wilson, for her part, enters the race with baggage (like Domenici, her de facto mentor, she was implicated in the scandal involving Iglesias’s sacking) but also some advantages. As her victory over Madrid last year demonstrates, she knows how to win tight races, and in addition, she is a formidable fundraiser (she raised more than $4.4 million for her 2006 re-election campaign).

However, facing Wilson could be a problem beyond a resurgent Democratic Party led by the powerful Richardson in New Mexico and the West, generally. Rep. Steve Pearce also appears interested in running for Domenici’s seat, and if he does, a nasty primary between the two representatives could ensue. Not only do rumors abound that Wilson and Pearce personally dislike each other, but Wilson is a confirmed moderate and member of the centrist Republican Main Street Partnership — while Pearce is a conservative member of the Republican Study Committee who bests her on the Club for Growth’s 2006 congressional scorecard and its recent RePork Card, thus creating the possibility of a Club-backed Pearce candidacy to match Wilson’s likely RMSP-backed candidacy.

Despite the fact that Wilson, the moderate, looks philosophically best-placed to carry this purple state, the conservatism of the GOP base combined with concerns about Wilson’s possible involvement in the U.S. Attorneys scandal (and possible Club dollars flowing to Pearce) could tip the balance against her — meaning an even bloodier primary fight. But it also raises the possibility that not only will Domenici’s seat lie open for the taking by a Democrat, who could have free rein to campaign without Republican interference as a GOP primary war wages, but so could both Wilson’s first district, and Pearce’s second district seats.

That, or a change of heart on Richardson’s part, would be a dream come true for Democrats, who thus far have identified only one candidate to run for Domenici’s seat — environmentally-friendly property developer Don Wiviott, whose main claim to fame is ranking among the top five fundraisers on the liberal fundraising clearinghouse site ActBlue.com during one week in September.

Not that Wiviott is likely to remain the frontrunner in the race for long — speculation is already abounding that if Richardson cannot be persuaded to enter the field, Sen. Chuck Schumer, chairman of the Democratic Senatorial Campaign Committee, will approach Lt. Gov. Diane Denish, the likely second-favorite candidate after Richardson. However, Denish seems focused on running for governor in 2010, meaning that other candidates might need to be considered — among them, Rep. Tom Udall (who would start the race with $716,000 in the bank), Albuquerque Mayor Martin Chavez, and Wilson’s old adversary, Patricia Madrid. (Both Chavez and Madrid could find their Latino roots advantageous in the state.)

Less than 24 hours after Domenici and Wilson’s respective announcements, it’s tough to have a feel for this race just yet, but one thing is for certain: New Mexico will be a state to watch next year and Republicans have every reason to be concerned.