German Chancellor Angela Merkel said that her conservatives faced tough negotiations with the Social Democrats (SPD) yesterday as they strive to form a ruling coalition, and it was unclear when the two blocs would be able to wrap up the talks.

More than four months after a national election, Europe's largest economy and pre-eminent power broker is in political paralysis, causing concern among investors and partner countries that policymaking on key issues like Britain's looming departure from the European Union and euro zone reform may be held up.

The conservatives and SPD had set themselves a Sunday deadline to agree on renewing the "grand coalition" that has governed since 2013 but some politicians said that the discussions could run into Monday or Tuesday - and even then SPD grassroots members still need to agree to any deal.

"It's not yet possible to say how long it will last - we did good groundwork yesterday but there are still important issues that need to be resolved," Merkel, in office for 12 years, said before heading into negotiations.

The parties reached agreements on energy and agriculture on Saturday but continued to haggle over healthcare.