German Chancellor Angela Merkel said she was prepared to make "painful compromises" as she headed in a final round of talks yesterday to seal a coalition deal for her fourth term and end months of political limbo in Europe's top economy.

As negotiators from Merkel's CDU party, her Bavarian CSU ally and the Social Democratic Party (SPD) gathered for one last push to clinch an agreement on a renewed "grand coalition", Merkel said it was time to end the political uncertainty.

"We live in turbulent times," she said, pointing to heavy losses in recent days on global stock markets. "We need a government that offers dependability in the interests of the people."

Merkel said all sides would "still need to make painful compromises" to get a deal. "I am ready to if we can ensure that the advantages outweigh the disadvantages in the end," she said.

Despite the protracted haggling, the parties sounded upbeat on meeting yesterday's self-imposed deadline.

SPD chief Martin Schulz said there was "good reason to believe that we'll reach the end today".

"I think that today will be the decisive day as to whether the three parties -- CDU, CSU and SPD -- will finish a joint coalition agreement on whose basis a stable government for Germany can be built," he said.

Party sources said the main sticking points were disagreements over healthcare, labour policy and defence spending.

Merkel has pinned her hopes on a repeat alliance with the SPD after September's inconclusive election left her without a ruling majority.