Berlin – German Chancellor Angela Merkel's conservatives and the centre-left Social Democrats (SPD) have hammered out a coalition deal, ending more than four months of political uncertainty in Europe's biggest economy.

Political confusion

Merkel's Christian Democrats (CDU), her Bavarian-based sister party, the Christian Social Union (CSU), and the SPD managed to resolve the final sticking points early on Wednesday morning, party sources told dpa.

The coalition talks had been extended twice from a Sunday deadline when agreement could not be reached over health insurance and labour market issues and the distribution of the ministerial portfolios.

To help secure the backing of SPD members for teaming up with Merkel for another four years, the party has grabbed the three top posts in the chancellor's new cabinet. This includes the Finance Ministry, the Foreign Office and the big-budget Labour and Social Affairs portfolio.

Social democrats to approve deal

Under the coalition, CSU chief Horst Seehofer has been handed a new beefed-up Interior Ministry, handling the critical areas of immigration, refugees and domestic security.

The decision to grant Seehofer the Interior Ministry comes ahead of a tough state election in Bavaria later this year, with the right-wing populist Alternative for Germany (AfD) having already made big gains in the southern state during September's election.

However, Merkel is likely to come under fire from within her party ranks over the divvying up of portfolios for her fourth term in power, with the CDU sacrificing the powerful Finance and Foreign portfolios so as to clinch a deal with the SPD, and also handing the Interior Ministry to the CSU.

Wednesday's agreement is also not the final stage along Merkel's long and tortuous journey to form a new coalition following September's inconclusive election: The SPD's more than 460,000 members now have to vote on the coalition deal in a ballot, with the results to be announced in the first weekend in March.