Chancellor Angela Merkel's conservatives and the centre-left Social Democrats are due to announce on Thursday if they will push on with efforts to forge a new government by around March or April.
Opening talks on a new coalition, Chancellor Merkel expressed optimism about breaking a deadlock with Social Democrat chief Schulz.
If the parties don't form a coalition, the only remaining options would be for Merkel's conservatives to lead an unprecedented minority government, or a new election.
The SPD initially said it wanted to go into opposition but was persuaded to consider a new coalition after German Chancellor Angela Merkel failed to form a three-way government with two smaller parties.
Party chief Martin Schulz will ask the deeply divided social democrats to give him the go-ahead for exploratory talks on joining Chancellor Angela Merkel in another coalition government.
The aura of invincibility around Merkel has been shattered. Can she bring together a workable coalition to stop Germany from falling deeper into crisis?
SDP leader Martin Schulz says his party has not yet agreed to negotiate a new coalition with Merkel, as reported in Germany's "Bild" newspaper.
Germany's Social Democrat Foreign Minister Sigmar Gabriel says it will take his party time to iron out its differences with Chancellor Angela Merkel's conservatives to renew their coalition.
German chancellor piles pressure on the Social Democrats to rejoin a "grand coalition" with the Christian Democratic Union as the EU power is still without a government since September 24 national election.
Germany’s political crisis arose in September when Chancellor Angela Merkel's conservatives and junior coalition partner SPD lost votes as the anti-immigrant AfD surged into parliament.
The move marks a U-turn for SPD leader Martin Schulz, who had previously ruled out any participation in a future government after he lost to Angela Merkel’s conservative Union bloc in the September vote.
Chancellor Angela Merkel says she will meet the German president to inform him that she has failed to form a coalition government with the Greens and the pro-business Free Democrats (FDP).
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