By Joseph Nasr and Andreas Rinke
BERLIN (Reuters) - Efforts to form a three-way coalition government have failed, Chancellor Angela Merkel said on Monday, pitching Germany into its worse political crisis for decades, raising the prospect of new elections and casting doubt over her future.
The pro-business Free Democrats (FDP) withdrew from talks after more than four weeks of fruitless negotiations with Merkel's conservative bloc and the environmentalist Greens, saying there was not enough common ground.
With German leadership seen as crucial for a European Union grappling with governance reform and Britain's impending exit, FDP leader Christian Lindner's announcement that he was pulling out spooked investors and sent the euro falling.
A tired-looking Merkel said she would stay on as acting chancellor and consult President Frank-Walter Steinmeier on how to move forward. A deal had been within reach, she said.
With the Social Democrats (SPD) sticking on Monday to their pledge after losses in a September election not to go back into a Merkel-led "grand coalition" of center-left and center-right, the most likely option looked to be new elections.
Steinmeier, who in the ordinary course of events is meant to play a non-partisan role above the cut-and-thrust of party politics, was due to give a statement at 1330 GMT.
"It is a day of deep reflection on how to go forward in Germany," Merkel told reporters. "As chancellor, I will do everything to ensure that this country is well managed in the difficult weeks to come.
The failure of coalition talks is unprecedented in Germany's post-war history, and was likened by newsmagazine Der Spiegel to the shock election of U.S. President Donald Trump or Britain's referendum vote to leave the EU - moments when countries cast aside reputations for stability built up over decades.
The collapse came as a surprise since the main sticking points - immigration and climate change policy - were not seen as FDP signature issues.
Green politician Michael Kellner accused Lindner of "bad theatrics", one of many who suggested the liberal, pro-business party had never been serious about negotiating.
"It is better not to rule than to rule the wrong way. Goodbye!" Lindner said, announcing his withdrawal in the small hours, blaming the breakdown on a lack of progress on education and tax policy - areas that had been seen as less contentious.
"Christian 'Better no deal than a bad deal' Lindner - Germany's Boris Johnson," wrote political commentator Max Steinbeis on Facebook (NASDAQ:FB), comparing Lindner to the British foreign minister and Brexit campaigner who is widely seen by Germany's political class as a dangerous and heedless loose cannon.
Germany now faces unappealing options not experienced in Germany's post-World War Two era: Merkel forms a minority government, or the president calls a new election if no government is formed.
The main parties fear that another election so soon would let the far-right, anti-immigrant Alternative for Germany (AfD) party add to the 13 percent of votes it secured in September, when it entered parliament for the first time. Polls suggest repeat elections would return a similarly fragmented parliament.
The SPD, which came second in the Sept. 24 election, said on Monday it had no wish to rejoin Merkel in a grand coalition and that voters should be given a say.
"We are not afraid of repeat elections. In such a situation, the ... voters must reassess what is going on," SPD leader Martin Schulz told a news conference. He added that a minority government was not a practical option in Germany.
Schulz also said he would meet Steinmeier and that Merkel had yet to contact him.
Some still believe that the SPD could change its mind, perhaps under pressure from Steinmeier, himself a former SPD foreign minister who served under Merkel.
Others felt the FDP could yet be prevailed upon to return to the negotiating table. The price for either party to change its mind could be the departure of Merkel, who for 12 years has been a symbol of German stability, leading Europe through the euro zone crisis.
Greens leader Kathrin Goering-Eckardt said she expected fresh elections.
Merkel was weakened by the September election as voters angry with her decision in 2015 to open the borders to more than a million asylum seekers punished her conservatives by voting for the AfD.
AfD politician Beatrix von Storch called the coalition talks collapse a success for her party, saying other parties' "fear of the AfD" had forced them to drive a hard bargain with the left-leaning Greens, who are dovish on immigration.
AfD leader Alexander Gauland demanded Merkel's resignation.
The inability to form a government caused disquiet elsewhere in Europe, not least because of the implications for the euro zone reforms championed by French President Emmanuel Macron and the negotiations over Britain's departure from the EU.
"It's not in our interests that the process freezes up," Macron told reporters in Paris, adding that he had spoken with Merkel shortly after the failure of talks.
In Brussels, Dutch foreign minister Halbe Zijlstra described the collapse as "bad news for Europe".
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