"We have cleared up all the outstanding issues, there is nothing further to resolve," Greens' spokeswoman Antje Möller said, adding the parties were set to unveil their coalition pact on Thursday.
The Greens and Merkel's Christian Democrats (CDU) have spent nearly two months thrashing out the unprecedented pact after elections in the northern city-state on February 25 saw Merkel's party lose its overall majority under Mayor Ole von Beust. The Christian Democrats' preferred coalition partners, the liberal Free Democrats, failed to win seats in the regional legislature.
Despite their deep ideological differences with the Greens, Merkel's Party has been seen as keen to test drive a pact at regional level ahead of national elections in 2009. Merkel has in recent month made little secret of her exasperation with her national coalition partners of the past three years, the Social Democrats (SPD).
At present, none of the parties seem likely to win a clear majority next year that would enable them to govern alone. The SPD has seen swathes of voters defect to another party further to the left, simply called The Left or The Left Party, who are fast redrawing Germany's political landscape.
The fraught national "grand coalition" became more strained in the run-up to the Hamburg vote when it emerged that the SPD were mulling a partnership with The Left in another state.
"The Social Democrats have ... shown themselves in recent weeks not to be reliable, " Merkel said in February. "This poses problems of course. We want to embody reliability."
Before Merkel took power in 2005, Germany was governed for seven years by a coalition between the SPD and the Greens.