Schröder and Merkel agree to end deadlock with coalition talks

A third round of talks between Angela Merkel's conservative Christian Demo-crats and Chancellor Gerhard Schröder's Social Democrats on forming a coalition between their parties concluded on an unexpectedly upbeat note.

Emerging from the negotiations in Berlin, Chancellor Schröder said there was now a " basis" for a coalition. Franz Müntefer-ing, the Social Democrat party leader, added: "Our ability for dialogue is proven; we now have to find ways to form a coalition government."

Angela Merkel, the conservative leader called the talks "successful". She said discussions between herself and Mr Schröder were aimed at finally settling their dispute over who should become the next German chancellor.

Informed party sources said the "chancellor summit" was expected today and would involve Ms Merkel, Mr Schröder, Mr Müntefering and Edmund Stoiber, the Bavarian conservative leader

The question of who will be chancellor has been the main stumbling block to a grand coalition agreement. Since the inconclusive outcome of Germany's general election on 18 September, Mrs Merkel and Mr Schröder have claimed the right to the job.

Before yesterday's talks, both sides appeared to have become so entrenched in their respective positions, that there was talk of their negotiations being called of. There was speculation yesterday that the Social Democrats were preparing to renounce their claim to the chancellorship in return for a greater share of cabinet seats.

Ms Merkel's conservatives emerged the strongest party in the election by only 1 per cent of the vote. But neither her party nor Mr Schröder's Social Demo-crats won enough votes to form a government on their own or with their preferred coalition partners.

Her claim to the chancellor's job was boosted at the weekend after her conservative party won a key by-election in the eastern city of Dresden. Her victory raised the number of federal parliamentary seats held by the CDU from 225 to 226, four ahead of the Social Democrats.

The conservatives' electoral gain appeared to have persuaded Mr Schröder to consider dropping his insistence that he remain chancellor. He said on German television on Monday that he would " not stand in the way" of negotiations aimed at forming a stable government.

But that provoked angry denials from his own party. Leading Social Democrat MPs are adamant that Mr Schröder remain chancellor. Ludwig Stiegler, the party's deputy parliamentary leader insisted Ms Merkel would never become chancellor with the help of Social Democrat votes. "Merkel stands for policies which are an anathema to employees," he said. "She has not got a big enough majority to become chancellor and she won't get one."

Mr Schröder, who has come under sustained media criticism over his refusal to step down as chancellor was even rebuked by his former wife, Hiltrud, a Social Democrat party activist, for his stance. She said it was time for him and his party to give up their claim and allow the strongest political party to field the chancellor.

Mrs Merkel appears to be winning support. A poll for N24 television showed 34 per cent of the electorate supported her claim to the chancellor's job compared to 29 per cent a week ago. Only 26 per cent wanted Mr Schröder to stay in office.

Attempts to form a coalition government with the Greens and the liberal Free Democrats collapsed after the election. The two main parties have said a joint grand coalition government is the only realistic way of breaking the deadlock and pressing ahead with badly needed economic and social reforms.

But Thomas Straubhaar, a leading expert from the Hamburg-based World Economic Archive, said: "Such an arrangement threatens to bring about a political standstill which would lead to a standstill in economic policy and reform. From a business point of view, this would be the worst of all possible scenarios."