Angela Merkel's efforts to forge a three-way ruling coalition could last all weekend after the parties missed the chancellor's deadline and failed to reach an agreement on key issues such as migration and finances.

The parties aimed to wrap up the talks on Thursday night but, after haggling for about 15 hours, agreed to adjourn until Friday. November, 17, 2017
The parties aimed to wrap up the talks on Thursday night but, after haggling for about 15 hours, agreed to adjourn until Friday. November, 17, 2017 (AP)

Tough talks between the parties hoping to form Germany's next government failed to reach a breakthrough overnight and were expected to resume on Friday as Chancellor Angela Merkel warned that "serious differences" remained between the sides.

Merkel had initially said she wanted to wind up the negotiations by Thursday, as she seeks to avoid fresh elections, but as the deadline passed and talks failed to yield an agreement by the early hours, she agreed for them to continue later Friday.

"We're going to an extension," Greens' co-leader Cem Ozdemir said, with the talks expected to resume at 10am (1100 GMT).

Volker Kauder, the parliamentary leader of Merkel's conservative CDU, said negotiations could even continue into the weekend, as he left marathon talks around 4am local time (0300 GMT).

Merkel warned earlier Thursday that the parties had "very different positions" on some policy issues, while adding "I believe it can work".

After weeks of quarrelsome exploratory talks, Merkel's CDU/CSU bloc, the pro-business Free Democrats (FDP) and the left-leaning Greens are hoping to find enough common ground to begin formal coalition negotiations.

The awkward bedfellows, who differ on everything from refugees and climate protection to EU reforms, have been pushed together by September's inconclusive election, which left Merkel badly weakened as the far-right Alternative for Germany(AfD) lured millions of voters.

For Merkel, eyeing a fourth term, the stakes couldn't be higher.

"If the conservatives, the Greens and the FDP can't pull together, there's no way to avoid new elections," Der Spiegel news weekly wrote.

The potential tie-up, dubbed a "Jamaica coalition" because the parties' colours match those of the Jamaican flag, is untested at the national level and questions abound as to how stable such a government would be.

"It's not just the chancellor's fourth term that depends on the success of Jamaica, but her entire political career," the best-selling Bild newspaper said.

Merkel herself set the Thursday deadline to reach an agreement in principle, with the goal of having a new government in place by Christmas.

But given the deep divisions between the parties, FDP deputy leader Wolfgang Kubicki had floated the prospect of extending the exploratory talks, even before Thursday's talks broke up.

"I believe we should give ourselves a few more days to reach a strong and sensible agreement," he told Spiegel.

The parties remain at odds over a long list of issues, with migration among the most contentious.

The conservatives are eager to tighten asylum policy after voters punished Merkel's decision to allow in over a million migrants and refugees since 2015.

Merkel's Bavarian CSU allies are even calling for a cap on migrant numbers, pitting them against the Greens who want to ease restrictions on family reunifications for asylum seekers.

The FDP's Kubicki urged the Greens to soften their stance, but they appear in little mood to compromise after already watering down key campaign pledges to overcome deadlocks on the environment.

The Greens notably abandoned demands for a 2030 end date for coal-fired plants and the internal combustion engine, and called on the other parties to show the same flexibility.

But Green proposals to make polluting diesel cars less attractive and close the country's 20 dirtiest coal plants have also met with resistance from the conservatives and the FDP, who worry about job losses and disrupting the mighty auto and energy sectors.

Despite the divisions, the parties have been able to reach some broad agreements in recent weeks.

At a time when the state coffers are bulging, they have committed to maintaining Germany's cherished balanced budget, improving the nation's outdated internet infrastructure and increasing child benefits. 

The parties, who are broadly pro-EU, also made headway on Europe after the liberal Free Democrats dropped their demand to wind down the eurozone's bailout fund.

Commentators say all sides will want to avoid triggering snap polls that could end up bolstering the AfD.

Surveys suggest there is little appetite for a return to the ballot box, and some two-thirds of voters say they expect the coalition negotiations to succeed.