The expressions of relief came as Angela Merkel vowed to press ahead with economic reforms -- a key focus of the European Union's current British presidency -- after she was nominated to succeed outgoing Chancellor Gerhard Schröder at the head of a left-right coalition.

European Commission head Jose Manuel Barroso "welcomes firstly the fact that the political parties have agreed on a government and a solution which ensures a stable and strong government for Germany," his spokeswoman said.

"He is happy that the period of waiting is over," she added.

The deadlock in Germany since a September 18 election had compounded the turmoil-wracked European Union's problems, from a flagging economy and squabbles over its funding to the crisis over its rejected constitution.

But on Monday, Germany's biggest parties confirmed a deal to form a grand coalition under Merkel, who will become the country's first woman chancellor.

French Foreign Minister Philippe Douste-Blazy hailed the end of the "period of uncertainty," saying: "There can be no European construction without perfect collaboration between France and Germany."

"Urgent decisions are needed on many European questions," added European Parliament head Josep Borrell. "I am sure that the next government will throw all its weight behind making progress on them."

Narrow victory could impose limits

But while the immediate stalemate has been overcome, analysts warn that the narrowness of Merkel's victory -- and the inevitable restrictions imposed by her coalition -- may limit Berlin's room to act at a crucial time for the EU.

The 25-nation bloc is facing an increasingly tight deadline to hammer out an accord on its budget for the period from 2007-13, after EU leaders failed in June to strike a deal.

British Prime Minister Tony Blair will no doubt be keen to welcome Merkel -- whose free-market ideas are much closer to his ideas than Schröder's were -- at an informal EU summit in London this month likely to focus on economic reform.

London argues that the EU -- whose growth has languished in recent years -- needs to shake up its traditional "European social model" if it is remain competitive faced with the emerging giants of China and India.

Merkel said Monday that she plans to focus on reviving Germany's economy, which has seen dismal growth and record unemployment in recent years.

"We agree we have no alternative to the reform process. We have set our aim to create a coalition that stands for new policies," she said.

Experts said Berlin should continue to be a key EU force. "I do not expect any significant change in the general European vocation of Germany," said John Palmer, of the European Policy Center in Brussels.

"What is more open to question is whether the new government will display ... the necessary degree of energy and strategic vision in providing leadership in moving the Union forward," he added.

Turkey and US

Turkey reacted in relaxed fashion. In contrast to Schröder's party, Merkel has campaigned against Turkey's full membership of the bloc.

"It's fine for us. I don't think that relations will cool off," a Turkish government official said. Ankara started EU entry talks last week.

The United States -- whose ties with Schröder were severely strained by the 2003 Iraq war -- also welcomed the news.

"We've had a strong relationship with Germany and have worked to strengthen it under Chancellor Schröder," State Department spokesman Tom Casey told AFP.

"We look forward to continuing that relationship with the new government and look forward to working with it in the future."