The executive board of Merkel's CDU party backed the deal she negotiated with her ally Edmund Stoiber of the Christian Social Union (CSU), SPD chairman Franz Muentefering and Schroeder, a source at Monday's board meeting told Reuters.
"The board has approved the proposed agreement by a large majority," an SPD spokeman said, commenting after the board met on Monday to learn of the outcome of overnight negotiations.
The SPD would nominate ministers for foreign, financial and labour market affairs, SPD sources said.
The move followed three weeks of intense haggling after an inconclusive 18 September general election which left the Christian Democrats narrowly ahead, but not by enough to form a coalition with their preferred free-market partners.
The new government's first task will be to rejuvenate the battered economy, crippled by sluggish growth and chronically high unemployment currently more than 11%.
According to reports citing sources close to the SPD, the Social Democrats will take the key ministries of foreign affairs, finance, labour and justice, as well as environment, aid and cooperation, health and transport.
Schroeder willl depart but his
SPD will retain key ministries
The CDU and its Bavarian sister CSU would also have eight cabinet posts - Merkel as chancellor, a minister of state at the chancellery, and the economy, interior, defence, agriculture, education and family ministries.
The CSU said formal negotiations to put the grand coalition - last seen in Germany in the 1960s - in place would begin next week.