Rivals Vow More Talks to Break Deadlock

"Differences of opinion between the two sides were massive," Merkel said after the discussions, which were aimed at working out how to end the debilitating political stalemate caused by Sunday's inconclusive general election.

With no clear winner, Germany is effectively locked in political paralysis while the two main parties race to be the first to assemble a coalition with a governing majority. Both Merkel -- whose Christian Democrats (CDU) narrowly won the election but without the majority they had been seeking -- and Schröder insist they have a mandate to rule the country.

They agreed to meet again next Wednesday.Thursday's one-hour discussions set the tone.

"I made it clear that I, together with the Christian Democrats, have a mandate to form a government," Merkel said.

"We made it clear we want to govern with Schroeder as
chancellor," retorted Social Democrats' leader Franz Muentefering.

Schröder, for his part, said: "We want a stable government and the parties have the responsibility to put in place such a government for the whole of the legislative period and I am sure that that will be the case."

Desperate search for solution

With neither the Christian Democrats nor Social Democrats able to achieve a majority with their respective preferred coalition partners, the free-market liberal Free Democrats (FDP) for the CDU and the Greens for the SPD, each party is searching for other solutions.

Most observers believe the final outcome will be a so-called grand coalition of conservatives and Social Democrats.

A poll released on Thursday by the Emnid institute showed 47 percent of Germans would like to see Merkel lead a grand coalition, against 44 percent for Schröder.

Before her talks with Schröder's party, Merkel had held early discussions with the Free Democrats. Bidding to keep alive her ambition of becoming the country's first woman leader, Merkel said afterwards that the Christian Democrats would not accept the formation of a minority government.

"I do not believe a minority government is fitting for a country as important as Germany," she said. Separately, Merkel said that she saw difficulties in any coalition between the Christian Democrats and Greens, whom she will meet for talks on Friday.

One proposal has been for the Christian Democrats to join with the FDP and the Greens in a coalition dubbed "Jamaica" because the parties' black, yellow and green colors would match the Caribbean nation's flag.

Despite result, Merkel confirmed as leader

Just a week ago, Merkel, the 51-year-old trained physicist from the former East Germany, had been tipped to secure a ruling majority. But Merkel saw the 20-point lead her party had enjoyed early in the campaign eroded to under one percent by Schröder's party on election day. She was overwhelmingly re-elected as the head of her party's parliamentary group on Tuesday, giving her a much-needed vote of confidence ahead of talks.

Newspapers reported on Thursday that Schröder's party had raised the idea of changing the rules of parliament in order to give it a numerical advantage in seats. One suggestion -- denied by the SPD -- would be to divide the conservative parliamentary bloc into its two constituents, the CDU and its Bavarian sister party, the Christian Social Union (CSU). Each party would then have fewer seats than the Social Democrats, allowing Schröder to claim his group was the biggest in the Bundestag lower house.

CSU leader Edmund Stoiber, who was also taking part in the negotiations on Thursday, hit out at this plan, saying Schröder's party must "accept that he has not won the election and that he has lost it." "They cannot correct the election result with legal tricks... it will not work."

Business leaders concerned

Meanwhile German business leaders are worried that the process of forming a government will drag on for weeks, delaying economic reforms seen as urgently needed and doing nothing to cut a crippling 11.4 percent unemployment rate.

"We've been on a economic downtrend for the past three years that needs to be stopped," said Dieter Hundt, the head of the BDA employers association.

"Without a new start that has growth and employment as its top priority, that downward trend will continue."