Merkel's disputed liberal refugee policy that let in more than a million asylum seekers since 2015 came back to haunt her, with a motley crew of potential partners digging in their heels on diametrically opposed demands on immigration.
After weeks of quarrelsome exploratory talks, Merkel's CDU/CSU bloc, the pro-business Free Democrats (FDP) and the left-leaning Greens are hoping to find enough common ground to begin formal coalition negotiations.
The awkward bedfellows have been pushed together by September's inconclusive election, which left Merkel badly weakened as the far-right Alternative for Germany (AfD) lured millions of voters angry over the refugee Influx.
Party leaders will resume their high-stakes haggling at midday Friday, and negotiators have signalled that talks could drag into the weekend.
“We shouldn't put ourselves under pressure,” said Peter Altmaier, Merkel's chief of staff.
He also voiced optimism about reaching a deal, saying that “the problem is solvable”.
But the deputy leader of the liberal FDP, Wolfgang Kubicki, sounded more pessimistic, warning that “the positions have hardened”.
'Merkel's career at stake'
After suffering a humiliating loss at the polls, the centre-left Social Democratic Party has gone into opposition and ruled out returning to a grand coalition with Merkel.
The veteran leader, who has steered Germany through crises including the global financial meltdown and the eurozone's debt woes, therefore risks returning to the polls if she fails to get the CSU, FDP and Greens on board.
But the potential tie-up, dubbed a “Jamaica coalition” because the parties' colours match those of the Jamaican flag, is also untested at the national
level and questions abound as to how stable such a government would be. “It's not just the chancellor's fourth term that depends on the success of Jamaica, but her entire political career,” the best-selling Bild newspaper said.
A 62-page working document that could form the blueprint for an agreement, seen by AFP, showed that the parties remain at odds over several issues, with migration among the most contentious.
Merkel's Bavarian CSU allies want a cap on migrant numbers, pitting them against the Greens who want restrictions eased on family reunifications for asylum seekers.
The FDP's Kubicki said his party has “tried to build bridges”, urging the Greens to soften their stance.
But the ecologists appear in little mood to compromise after already watering down key campaign pledges to overcome deadlocks on the environment.
The Greens notably abandoned demands for a 2030 end date for coal-fired plants and the internal combustion engine, and called on the other parties to show the same flexibility.
At the same time, Green proposals to make polluting diesel cars less attractive and close the country's 20 dirtiest coal plants have also met with resistance from the conservatives and the FDP, who worry about job losses and disrupting the mighty auto and energy sectors.
New polls? No thanks
Despite the divisions, the parties have been able to reach some broad agreements in recent weeks.
At a time when the state coffers are bulging, they have committed to maintaining Germany's cherished balanced budget, improving the nation's outdated internet infrastructure and increasing child benefits.
The parties, who are broadly pro-EU, also made headway on Europe after the liberal Free Democrats dropped their demand to wind down the eurozone's bailout fund.
Commentators say all sides will want to avoid triggering snap polls that could end up bolstering the AfD.
Surveys suggest there is little appetite for a return to the ballot box, and some two-thirds of voters say they expect the coalition negotiations to succeed.
SPD party chief Martin Schulz predicted Friday that an unambitious deal would be found “on the smallest common denominator” but urged the parties to act quickly.
“Germany can't wait. Europe can't wait,” he said.