Federal and state representatives in Berlin gave up on talks early Monday morning, with conservative Labour Minister Ursula von der Leyen announcing discussions would resume with party leaders on Tuesday.
But von der Leyen, who has been working for months on a reform package to raise minimum social benefits, admitted there was little possibility of reaching a compromise by Friday.
“These are difficult negotiations,” she told reporters.
The plan includes an increase of minimum benefits for adults by €5 to €364 per month and benefits for needy children such as an allowance for school supplies, activities and warm midday meals.
The main disagreements centred on the minimum benefits for adults, with members of the opposition environmentalist Greens and centre-left Social Democrats (SPD) doggedly insisting on changes, von der Leyen said.
Green party deputy parliamentary floor leader Fritz Kuhn said that equal pay for temporary workers was also a sticking point during the lengthy negotiations.
“Overall it's a tough thing,” he said, adding that the Greens and the SPD remain willing to find a solution.
But he also said that Chancellor Angela Merkel's coalition of conservative Christian Democrats and pro-business Free Democrats must be prepared to bend on three points, including increases to minimum benefits, minimum wage, and the planned educational programme for children.
The failed talks are a second blow to Merkel's centre-right government after the Bundesrat blocked the welfare changes in mid-December. The defeat delayed plans to implement the reforms by January 1.
The Bundesrat, which represent the country's 16 states, voted down a proposal to raise minimum social benefits in the first such setback for Merkel since losing her majority in the upper house last May.
Last year the country's high court ruled that the terminology and payment system for welfare benefits was too confusing and must be changed by the end of the year. The current basic payment is €359 per month, but critics say this should be increased to at least €420.
The government has estimated there are around 6.5 million recipients of Hartz IV, including 1.7 million children, the long-term unemployed, the handicapped and those too sick to work.
Hartz IV was named after Peter Hartz, the head of a commission that suggested changes to Germany's labour market and welfare system in 2002. It specifically refers to long-term unemployment benefits instituted in 2005, and has become synonymous with former Chancellor Gerhard Schröder's highly unpopular Agenda 2010 reforms.