The German Chancellor Angela Merkel’s conservatives and the opposition Social Democrats (SPD) have agreed to meet again to explore forming a "grand coalition".
Merkel's Christian Democrats (CDU/CSU) emerged as the dominant party from the September 22 election but need a coalition partner and Friday's meeting marked the start of complex horse-trading that could last two months or more.
"It makes sense and it is necessary to continue exploratory talks," said Hermann Groehe, general secretary of CDU, who also praised a "business-like and constructive".
The campaign-trail rivals discussed whether they could again form a left-right government, as they did during 2005-09, and agreed to continue talks in 10 days.
Germany's European partners are watching the coalition manoeuvring in Berlin closely, concerned that delays could push back EU-wide decisions on important financial crisis-fighting measures like the ambitious banking union project.
"Europe is watching us, the world is watching us," Merkel said at an event in Stuttgart ahead of the negotiations. "We have the common responsibility to build a stable government."
The SPD are seen as the conservative chancellor's most likely partner, but they have said they will not be rushed into a deal. However, there is deep resistance among SPD members to enter another "grand coalition" with Merkel, after hooking up with her in her first term only to plunge to their worst post-war result in the 2009 election.
Merkel's outgoing ally, the Free Democrats, suffered the same fate. After four years as her junior partner, they obtained less than 5 percent of the vote and so were booted out of the German parliament for the first time since 1949.
Merkel will also hold preliminary talks with the Greens next week, playing potential partners off against each other.
The talks between Merkel and the SPD will examine whether policy compromises are feasible. Once these preliminary discussions are completed, a group of 200 senior SPD officials from across Germany must flash a green light before the party enters more formal coalition negotiations with Merkel's CDU.
"It is still an open question as to whether or not it will come to formal coalition talks," said Andrea Nahles, general secretary of the SPD, striking a firm negotiating stance.
Nahles has said it could take until December or January for a government in Europe's largest and most powerful economy to be formed.
Political risk analyst Carsten Nickel at Teneo Intelligence said such claims were tactical posturing and he expected a deal earlier, noting that "a prolonged period of partisan bickering would not pay off with Germany's stability-prone electorate."
Moreover no party would want to risk exacerbating the euro zone crisis. Merkel's cabinet will act as caretaker government and "act if immediate decisions were required, for instance on Greek financing needs for 2014", Nickel said. "Where possible, however, the preference will be to postpone decisions until a new government is in place."
Tax policy showdown
The aim of the formal coalition talks would be to agree to a policy blueprint for the next government, as well as the allocation of top cabinet posts. At the very end, the SPD has said it will have to go back to its 472,000 grassroots members and seek their approval before agreeing to an alliance with Merkel.
This raises pressure on the chancellor to make compromises, but it also poses a serious risk to the SPD leadership.
If the SPD rank and file were to reject a coalition deal negotiated by their leaders, party Chairman Sigmar Gabriel and other senior figures would probably have to step down.