Merkel warns 'very serious differences' blocking deal

Chancellor Angela Merkel warned Friday that Germany's top parties still had "very serious differences" to overcome ahead of next week's deadline for sealing a coalition deal.

Heading into what she called the "decisive phase of the negotiations" on a new right-left "grand coalition", Merkel said her conservatives and the Social Democrats (SPD) would have to haggle down to the wire.

"There is still a whole range of very serious differences -- we have an enormous amount of work ahead of us," she said in reference to policies on refugees, the labour market and health insurance.

"I hope we will succeed but the problems are, as I said, not yet solved."

Germany has been in political limbo since a September 24 election in which Merkel failed to win a clear majority, in part due to the rise of the anti-immigration Alternative for Germany (AfD) which took millions of votes from all major parties.

Merkel initially turned to two smaller parties, the Free Democrats and Greens, to form a new coalition government for her fourth term. But when those talks collapsed in November, she had to once more woo a reluctant SPD for a new pact.

Both main parties reached a breakthrough deal in January when they presented an in-principle agreement to start formal coalition talks that could lead to a new government for the biggest EU economy by the end of March.

However, with the devil in the details, they have again clashed on divisive policies -- especially SPD demands to shift temporary workers to permanent contracts, and to make Germany's health insurance system fairer.

National news agency DPA reported Friday that they also reopened another point of contention -- whether their agreed cap of allowing in 180,000 to 220,000 new asylum seekers a year should be regarded as a firm limit as sought by conservatives, or a flexible goal.