The main hurdle to a rerun of the so-called grand coalition of Germany's two main parties now lies with the Social Democrats, who at first refused to extend their alliance with Merkel after suffering their worst electoral defeat since World War II.
"We are convinced that Europe needs a fresh start and have developed the right ideas to go with it".
After more than 24 hours of n egotiations there were reports of an agreement between the negotiators.
After more than 24 hours of talks and months of political paralysis, red-eyed party chiefs and their negotiating teams reached an in-principle agreement to start formal coalition talks that could lead in coming months to a new government for the biggest European Union economy.
Merkel, the head of a conservative alliance made up of the Christian Democratic Union (CDU) and its Bavarian sister-party the Christian Social Union (CSU), will meet with Martin Schulz, the head of the Social Democratic Party (SPD), for preliminary talks this week.
"The negotiations are not just about a coalition, but also their careers", said Karl-Rudolf Korte of Duisburg-Essen University. The three coalition parties' support dropped by a cumulative total of almost 14 percentage points in the election.
Germany s economic health has stood in stark contrast to the political paralysis, which has entered a fourth month.
Seeking to push its social welfare agenda, the SPD is demanding greater relief for the lower and middle income brackets while seeking tax hikes for top earners.
The embattled mainstream parties have struggled to fend off the encroaching far right, which has seized on anger over a mass influx of more than one million migrants and refugees since 2015.
If Merkel is unable to come to an agreement with the SPD, Germany will be run by a minority government Such a weak government will leave Merkel further besieged, and out-of-step with a German electorate which seems hungry for changes which can't be delivered by either the center-right or center-left.
Participants have described the negotiations as "good", but SPD leaders need to convince their party members as they are offering them a vote on January 21 on whether to proceed.
The SPD's youth wing chief Kevin Kuehnert has said he would embark on a national tour to press his case against a new grand coalition, known as "GroKo" in German political shorthand.
She says "many, many hours of work, serious wrangling and shaping are contained in these 28 pages".
If that happens, it could still take several more months before a new government would be in place.
Even if the path is then completely clear for a grand coalition, a new government is not expected to be formed before Easter.
Another poll published by public broadcaster ARD found that only 45% viewed a new grand coalition positively, while 52% did not.
And a third survey, for business paper Handelsblatt, showed that 56 percent believed Merkel would not see out her four-year term.