Many were expecting a result in the chancellery stand-off by late Thursday evening after Christian Democrat (CDU) leader Angela Merkel, her Bavarian ally Edmund Stoiber, head of the CDU's sister party the Christian Social Union, Chancellor Gerhard Schröder and Social Democrat chief Franz Müntefering concluded their meeting scheduled for 19:00 UTC.

But earlier in the day, Merkel announced that a deal would not be reached until the weekend, with more talks planned before Sunday. "I have informed (the party executive) there will be further decisions made in the leadership talks and also said there will probably not be decisions from these talks before Sunday evening," she told reporters after a meeting of CDU leaders.

Both she and SPD leader Franz Müntefering said no further announcements were planned before the completion of talks, but they were confident a deal would be reached.

Müntefering said a decision on the chancellery would not be known until Monday, when he would submit the outcome of the talks to the SPD leadership. "On Monday we can say definitively who will be the next chancellor," he said.

CDU expects stubborn Schröder to stand down

The conservatives expect Schröder to eventually concede to Merkel in their stand-off over who will head a new government.

"We are a few hours away from a concession that will see Angela Merkel become the first woman to be German chancellor," Wolfgang Bosbach, the deputy leader of the CDU parliamentary group, told national radio.

Günther Beckstein, the interior minister of the conservative-run southern state of Bavaria, said it was time for Schröder's party to accept that it had lost the election. "Either we have a woman chancellor or the talks fail," he said.

Schröder has shown a stubbornness in the weeks following the Sept. 18 election that suggest he will not go without a fight. The chancellor has refused to concede defeat, even though the conservatives won four more seats in parliament.

However, earlier this week Schröder hinted he may give up the post he has held since 1998, saying he would not stop the creation of a stable government.

In a statement of support, SPD chief Müntefering said it was still the party's aim to keep Schröder in the chancellery but his tone was less belligerent than that used by the Social Democrats in recent days. "The party wants him as chancellor. We'll fight for that and argue for it and hold talks," he said.

Opposition to Merkel waning

Many attending the meeting of party leaders during the day on Thursday said that previously strong SPD objections to supporting Merkel as chancellor were softening. Merkel's most ardent critic in the Social Democrats, Ludwig Stiegler, deputy head of the parliamentary party, was being isolated in the discussions, sources told Reuters.

Despite the stalemate over who will lead Germany, it looks increasingly likely that the two main parties will find consensus to form a grand coalition. Neither Merkel's conservatives nor Schröder's Social Democrats (SPD) won a majority with their preferred allies in the election.

Grand coalition getting closer

The two parties have softened their tone in reference to the possibility of a red-black coalition in recent days with comments hinting at a closing of the gap between their differences. Both the CDU and SPD appear to agree on the need to bring Germany's escalating deficit back under EU limits, unravel the mess of conflicting state and federal powers and simplify Germany's notoriously complex tax code.

News that a working government may finally soon be in place is good news for both the euro and German shares. The European Union has been on tenterhooks over Germany's power struggle with the knock-on effect affecting the single currency. Financial markets have also banked on a new government tackling economic reforms and will be relieved to hear that this goal will be one shared by whoever takes the reins.

Transition to new government to be far from smooth

But barriers remain. The Social Democrats are still refusing to give in to the conservatives on plans to ease hiring and firing rules, loosen the system of sector-wide pay deals and on reforms to health insurance funding. Whatever deals are struck over the coming days, the transition to a new government will be far from smooth.

"I'm afraid the negotiations are more likely to last three weeks than two," said Christian Wulff, conservative state premier of Lower Saxony, "but if they're good negotiations with a good result, then the old rule applies: thoroughness before speed."