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What is the difference between "stattdessen" und "anstatt"?

In the dictionaries, they both mean "instead" but their usage seems to be slightly different and not interchangeable.

this sentence was WRONG:

Wegen Baustellen musste man anstatt auf der Landstraße fahren

but this was correct:

Wegen Baustellen musste man stattdessen auf der Landstraße fahren

and this usage of anstatt was correct:

Wegen Baustellen musste man anstatt auf dem Radweg auf der Landstraße fahren

It also feels like I could say "Anstatt Kaffee nehme ich Tee" however it sounds wrong to use "stattdessen".

What is the difference between them and how can one use these terms correctly?

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Basicaly, "anstatt" is a preposition. Think of "anstatt" as "instead of" (something), and "stattdessen" as plain "instead" (hopefully the purists won't growl too much at me for saying this), or "instead of that", but the "that" must refer to something that has already been mentioned before.

  1. Due to roadworks you must use the road instead of the cycle lane (-> anstatt)

  2. Due to roadworks you must instead use the road (-> stattdessen)

Presumably, in case 2. there is a previous sentence that introduces the fact that one can't use the cycle lane, so for example:

(You can't use the cycle lane.) Due to roadworks, you must use the road instead. (-> stattdessen)

Another example:

I won't go to work today. Instead, I'll go to the beach

here you use "stattdessen"

Heute gehe ich nicht zur Arbeit. Stattdessen gehe ich an den Strand.

But:

Instead of going to work, I'll go to the beach

here it's "anstatt" (or "statt", or "anstelle"):

Anstatt zur Arbeit zu gehen, gehe ich an den Strand.

Another way of looking at it: if you are familiar with german compounds, you can think of "stattdessen" as being a compound of "(an)statt" + "das"; since "(an)statt" requires the genitive when used as a preposition before something that can be declined, the compound has become, at some point in history, "stattdessen".

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Stattdessen refers to something which was mentioned before. Your second sentence, which uses stattdessen, would raise the question "Instead of what?" if the context didn't clarify. So, if the context answers that question, you can use stattdessen to avoid repetition.

Der Radweg war gesperrt. Wegen Baustellen musste man stattdessen auf der Landstraße fahren.

Anstatt (and statt) requires that you add in place of what the alternative was applied.

Statt[=Anstatt] auf dem Radweg musste man auf der Landstraße fahren.

Note, that stattdessen consists of the two words statt and dessen. The former part implies that something was replaced by an alternative, and the latter part adds–so to say–the reference. In that respect dessen is the substitution for auf dem Radweg.

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