By Madeline Chambers
BERLIN (Reuters) - Chancellor Angela Merkel set her sights on forthcoming talks with the Social Democrats (SPD) as a path to forming a stable government in Germany and rejected new elections after three-way coalition talks collapsed last weekend.
Merkel's fourth term was cast into doubt when the pro-business Free Democrats (FDP) walked out of talks with her conservative bloc and the Greens last Sunday, causing a political impasse in Europe's biggest economy.
But on Friday, the Social Democrats (SPD) reversed a previous decision and agreed to talk to Merkel, raising the possibility of an extension of the 'grand coalition' which has ruled Germany for the last four years, or a minority government.
Addressing party members on Saturday, Merkel argued voters had given her conservatives a mandate to rule in a Sept. 24 election which handed her party the most parliamentary seats but limited coalition options.
"Europe needs a strong Germany, it is desirable to get a government in place quickly," Merkel told a regional party meeting in northern Germany, adding, however, that her acting government could carry on day to day business.
"Asking voters to go to the polls again would, I think be totally wrong," she said, stressing instead that voters had spoken and her party had a mandate. On Monday, Merkel had said she would prefer new elections to a minority government.
Sounding self-assured, even cracking the odd joke, and receiving regular applause during her speech, Merkel said she wanted to look ahead after the setbacks of the last week and she clearly turned her attention to the SPD.
"WORKED WELL" WITH SPD
She welcomed the opportunity to explore the possibilities with the SPD, provided it take place on the basis of mutual respect.
Merkel defended the record of the last 'grand coalition', saying under its leadership Germany enjoyed the strongest labor market for decades, a balanced budget and pensioners and families had benefited.
"We worked well together," she said.
Merkel also laid out some priorities for a future government, including maintaining solid finances, making some tax cuts, extending the digital infrastructure and aiming to limit the number of migrants entering Germany to 200,000 per year.
Acknowledging an election result that reflected voters' fears and insecurities - the conservatives and other parties bled support to the far-right Alternative for Germany (AfD) - Merkel acknowledged the task ahead was difficult.
"The election result shows that we have a mountain of tasks ahead," she said.
SPD leader Martin Schulz, who had come under intense pressure to agree to talks for the sake of political stability, after rejecting the idea since election night, said on Friday that there was nothing 'automatic' about the outcome.
He has promised party members a vote on the talks. The SPD is split as many members fear that renewing a grand coalition would be political suicide. It scored its worst result since 1933 in the September election.
Some senior SPD members have made clear that the party would not be held hostage by Merkel. "Mrs Merkel is not in a position to be setting conditions," Malu Dreyer, premier of the state of Rhineland Palatinate, told the Trierscher Volksfreund.
(Reporting by Madeline Chambers; Editing by Alexander Smith and Stephen Powell)