BERLIN - German Chancellor Angela Merkel sought on Sunday to broker a deal on tax cuts between her conservatives and the Free Democrats (FDP) and achieve a breakthrough in tricky talks to form a center-right coalition.
Germany's conservatives, including Merkel's Christian Democrats (CDU) and Bavaria's Christian Social Union (CSU), are trying to forge a four-year policy agenda with the business-friendly FDP after September 27's election.
While the three parties have agreed on a range of issues, from basic principles on nuclear energy to financial market regulation and several areas of foreign policy, the biggest obstacle is the scale of tax cuts and how to finance them.
The parties expect to clinch a final deal, which will also include the thorny issue of cabinet posts, in the next week.
I see the summit of the mountain but we have quite a difficult path ahead of us, said CSU leader Horst Seehofer, who was taking part in Sunday's talks.
Both the conservatives and FDP campaigned for tax relief but they are at loggerheads over the details, due mainly to a ballooning budget deficit in Europe's biggest economy.
Talks have focused on cuts of about 20 billion euros ($29.84 billion), which would be closer to the conservatives' election pledge of 15 billion euros than the FDP's 30 billion euros vow.
Tensions between the FDP and CDU erupted on Saturday when FDP chief Guido Westerwelle threatened to break off talks if the CDU as a whole agreed with one member's description of the FDP plans as unrealistic to the point of flying blind, media said.
Some senior members of the CDU think ambitious tax relief is unaffordable and want to rein in spending to finance the tax cuts plus a 30 billion euro budget hole. However, Merkel has ruled out an aggressive cuts program.
Economists and commentators say there is no sign so far that Merkel will adopt a more radical policy platform than she did in her four-year coalition with the Social Democrats.
A further sticking point is the financing of Germany's health fund which needs a 7.5 billion euro cash injection.
The parties have agreed to try to extend the working lives of some nuclear power plants, but details are unclear. The Berliner Zeitung newspaper reported the extensions could last 10 years.
(Reporting by Andreas Moeser; Writing by Madeline Chambers; Editing by Jon Hemming)