Presenting the fruits of 17 hours of tense talks overnight after five weeks of horse-trading, a remarkably jovial Merkel joined the leader of her Bavarian allies the CSU and the centre-left Social Democratic Party (SPD) to welcome a "grand coalition to accomplish grand tasks for Germany".
"We have a good chance of being able to say in 2017 that people are doing better than they were today," said Merkel, who romped to a third four-year term in September elections but fell just short of an absolute majority.
"This agreement is aimed at restoring fairness and re-establishing the social balance where it's been lost," SPD leader Sigmar Gabriel said, adding that he was "extraordinarily grateful" to the conservatives that the coalition deal could be signed.
"I am highly satisfied with the content of the agreement," CSU chief Horst Seehofer added, trading jokes with Gabriel and Merkel at a relaxed 90-minute news conference.
European markets welcomed the end of political uncertainty in the continental powerhouse, with stocks and the euro rising on news of an agreement.
The chancellor hopes to be sworn in on December 17th, but a key hurdle remains: SPD members must still sign off on the coalition pact in a binding ballot next month.
Gabriel, who is expected to become Merkel's vice-chancellor and possibly head a super-ministry encompassing the economy and energy policy, said he was confident a "large majority" would be behind the agreement when the votes are counted, probably on December 14th.
But the outcome remains far from certain because many members reject the notion of their traditionally blue-collar party again governing in the shadow of powerful Merkel, as it last did in 2005-2009.
After that uneasy political marriage, the SPD suffered two humiliating electoral defeats in a row, winning less than 26 percent against the conservatives' nearly 42 percent in the September 22nd vote.
In the final haggling, the SPD scored key concessions, including a national minimum wage from 2015, while Merkel stuck to her guns on her own red-line issues, blocking higher taxes for the rich and opposing new debt from next fiscal year.
The centre-left daily Süddeutsche Zeitung said the 185-page pact wasn't perfect but that Social Democrats ought to back it.
"You can't expect more from a grand coalition than small steps. But is it worth rejecting? Surely not," it said.
Social Democrats forced an agreement to stay silent for now on who would get which portfolio in the next Merkel cabinet so that members would focus on policy achievements.
Merkel and Gabriel acknowledged that ministries had been discussed during the lengthy negotiations but declined to be drawn on details.
However, conservative veteran Wolfgang Schäuble is widely expected to stay finance minister while Social Democrat Frank-Walter Steinmeier is set to head back to the foreign ministry following his 2005-2009 stint there.In the protracted talks,
The SPD scored a major victory on its core demand, a minimum wage of €8.50 euros per hour from early 2015 to help the country's army of working poor.
The move aims to narrow a wealth gap brought about by decade-old labour reforms but should also cheer critics in the United States, the IMF and Europe who want the European export-power to stimulate domestic demand and correct its lopsided trade balance.
The SPD also pushed through a demand for a 30 percent women's quota on the boards of listed companies from 2016, and the scrapping of a ban on dual nationality, a key demand of Germany's large Turkish immigrant community.
Both sides also agreed on pension increases to protect retirees in rapidly ageing Germany.
Bavaria's CSU also brought home the bacon on its own pet issue - charging foreign drivers a toll for using Germany's famed autobahn highways, negotiation sources said.
In all, the additional spending and investment agreed by all sides until 2017 amounts to €23 billion, reported national news agency DPA.
Details of the more than 170-page coalition deal were to be presented at noon on Wednesday German time.