German public broadcaster ZDF reported the news, but official confirmation of the deal is still pending as talks between the two parties continued Monday morning. Sources within Schröder's Social Democrats said that a further meeting is scheduled for 11 a.m. local time.

The conservatives, who finished just four seats ahead of Schröder's party in Sept.18 elections, have put intense pressure on German Chancellor Gerhard Schröder to step down and allow Merkel to become the first female head of Germany's government.

Grooming Merkel?

German Interior Minister Otto Schily meanwhile had renewed calls for a solution that would see Schröder remain chancellor for two years with Merkel taking over for the next two years.

"It would strengthen the necessary trust of both parties in each other and would stabilize a grand coalition," Schily told Sunday's edition of the Frankfurter Allgemeine newspaper.

He suggested Merkel should be foreign minister to begin with, building "the international contacts she doesn't have at the moment and which she would urgently need as a chancellor."

But Christian Wulff, a leading member of Merkel's Christian Democratic Union (CDU), said the only issue the conservatives would not concede was the chancellery.

"The Union will only be in a government led by Angela Merkel," Wulff told Saturday's Passauer Neue Presse newspaper. "On all other issues we will negotiate and accommodate the Social Democrats."

Cabinet equality?

Schröder and Merkel were accompanied in the talks on both Sunday and Monday by the Social Democrats' party leader Franz Müntefering and Edmund Stoiber, the head of the Christian Democrats' Bavarian sister party.

The party leaders have warned that it could be several weeks before a government is formed. Both parties have agreed that they will not reveal details about the talks before they have reached a deal, but both sides will reportedly hold the same number of cabinet seats.