Negotiators for the centre-right government and the centre-left opposition blamed each other for the impasse.
"We looked for a solution, but were unable to find one with the opposition," said Labour Minister Ursula von der Leyen, a member of the conservative Christian Democrats. She said her party, and Christian Social Union and the Free Democrats – all members of the ruling coalition – had been prepared for compromise but had been faced with an opposition that demanded too much.
From the other side of the table, negotiator for the Social Democratic Party, Manuela Schwesig, said she regretted that the government had broken off negotiations and put the blame on Chancellor Angela Merkel.
"Merkel sent down an order, and it was to let these negotiations fail," she said.
She said the opposition would continue to try to help poor children and demanded that the government return to the negotiating table.
Both parties had also failed to reach an agreement during a previous, 10-hour round of talks held overnight Sunday into early Monday.
The government is proposing raising welfare payments for 4.7 million jobless and under-employed people €5 to €364 a month, in response to a constitutional court ruling last year forcing it to change the way minimum welfare payments are set. Some critics say this should be increased to at least €420.
The government has called for a Wednesday meeting of a parliamentary mediation committee, even without an agreement with the Social Democrats, to try to get a compromise on the issue in time for a Friday vote in the Bundesrat, Germany's upper house of parliament that represents the country's 16 federal states.