Merkel and left pencil in third round of talks on coalition

By Stephen Brown and Michelle Martin BERLIN (Reuters) - German Chancellor Angela Merkel's conservatives and the Social Democrats (SPD) said early on Tuesday they were likely to hold a third round of talks later this week to explore the possibility of forming a coalition government. After eight hours of discussions, Hermann Groehe, second-in-command of Merkel's Christian Democrats (CDU), said they had "protectively" agreed to meet again on Thursday to discuss reviving the 2005-2009 'grand coalition' with the SPD. "It is conceivable that we will meet again for more talks on Thursday at midday," Groehe told reporters in the early hours of Tuesday, exercising caution because of talks with the smaller Greens party scheduled for later in the day. Merkel needs to find a partner for her third term after she won September's election but fell short of an absolute majority. Polls suggest the German public would like her to enter full-blown negotiations with the SPD rather than the Greens. Formally, a final decision on whether Germany's two biggest political forces will meet again later this week depends on the outcome of discussions with the environmentalists, who are now the smallest party in the Bundestag lower house. "They (the conservatives) have further exploratory talks with the Greens tomorrow and then we'll see what the situation is," said the SPD's Andrea Nahles. "We then envisage - though it is only one option - an appointment on Thursday for possible further discussions." But the CDU and their Bavarian sister party, the Christian Social Union (CSU), made it clear they were edging closer to a preliminary deal with the SPD to sit down for more detailed coalition negotiations. These are likely to drag on for weeks. The SPD went into the talks ready to dig their heels in on the question of introducing of a minimum wage across Germany. "We identified similarities in some areas but differences in other areas such as a minimum wage and tax rises," said Nahles. But the CSU's Alexander Dobrindt, standing beside Groehe, said both sides appeared willing to talk, adding: "We are further along the path where the SPD must come to meet us." EUROPE WAITING The SPD's demand of a minimum wage of 8.50 euros per hour across all sectors could be difficult for Merkel to sell to her supporters in the business world. She prefers a minimum wage by sector set by unions and employers, rather than by politicians. But the SPD, who came a distant second to the conservatives on September 22, are determined to exact a high price for entering their second alliance with Merkel in less than a decade. The last 'grand coalition' cost the SPD millions of votes. A compromise seems possible on SPD demands for tax hikes on the rich but the party will need further concessions to convince skeptical members to partner with Merkel again. About 200 SPD officials will decide on October 20 whether to keep talking to her. Merkel's conservatives emerged as the dominant force from the election but, with 311 of the 631 seats in the Bundestag, they lack a majority. Neither the SPD, who have 193 seats, nor the Greens, with 63 seats, seem desperate to join Merkel, whose last partners, the Free Democrats, failed to win any seats. The prospect of months of coalition talks worries Germany's European partners, who fear delays to crucial decisions for fighting the euro zone crisis, such as a plan for banking union. German Finance Minister Wolfgang Schaeuble said this weekend Merkel should have a government in place by mid-November, but Nahles said this timetable would be "a challenge". Merkel is keeping alive the option of the Greens despite resistance from CSU, which mocks the party born from the 1970s peacenik movement for its proposal that Germans observe a meat-free "Veggie Day" once a week. An alliance with the Greens was made theoretically possible by Merkel's decision in 2011 to accelerate Germany's exit from nuclear power. Such a partnership could however have trouble pushing legislation through the Bundesrat upper house. The SPD has promised all 472,000 party members a vote on a final coalition deal, introducing further uncertainty into the political outlook for Europe's largest economy. (Additional reporting by Holger Hansen and Andreas Rinke)