Chancellor Angela Merkel led her conservatives to their best result in over two decades in a German election on September 22 but must still find a coalition partner to secure a third term.
She will now focus on negotiations with the centre-left Social Democrats (SPD) after exploratory talks with the environmentalist Greens collapsed in the early morning hours of Wednesday.
Below are key coalition-related quotes from senior officials, as well as areas of potential compromise on policy and personnel.
HERMANN GROEHE (CDU)
"I want to stress also that even in areas where there were differences (with the Greens), there were none which we would have viewed as insurmountable.
"We will approach the representatives of the SPD tomorrow with a view to scheduling the explorative talks we had already eyed for Thursday."
ALEXANDER DOBRINDT (CSU)
"My feeling was that the Greens have understood the election result ... but were unable to take on the responsibility.
"We made clear what is not doable with us on taxes. That's a clear statement that can't be changed and the Greens made clear that is a threshold they can't cross."
CLAUDIA ROTH (GREENS)
"On the basis of these two very intensive rounds of exploratory talks, we don't believe the conditions are right for good cooperation."
POTENTIAL POLICY COMPROMISES
TAXES - During the campaign, the SPD urged a hike in tax rates on incomes above 100,000 euros to 49 from 42 percent to pay for higher investments in infrastructure, education and research. Merkel and her conservatives are open to higher public investment but have ruled out financing this through tax hikes or higher debt. Both sides have signaled a readiness to compromise, but finding the required revenues will be difficult. One solution for bringing more cash in longer-term would be to close tax loopholes for multinational corporations.
WAGES - The SPD has made a nationwide minimum wage one of its main demands in exploratory coalition talks. The CDU/CSU, which only supports "wage floors" on a regional or sectoral basis, may have to accept some form of blanket minimum wage, but it could end up lower than the 8.50 euros/hour the SPD wants.
EUROPE - No insurmountable differences. The SPD would seek symbolic steps to promote growth in struggling euro zone states, but is unlikely to press for more German taxpayer money to be used for this purpose. It will push for a financial transactions tax and faster movement towards a banking union, where banks themselves shoulder the costs of restructuring. The SPD is not expected to push hard for debt mutualisation, despite having backed the idea of a debt redemption fund during its campaign.
ENERGY - The SPD and CDU/CSU could reach a compromise on scaling back subsidies for renewable energy.
BARGAINING FOR CABINET POSTS
* Finance minister Wolfgang Schaeuble has signaled a desire to stay in his post, and is said to have the support of Merkel. Unless the SPD insist on the finance ministry as a condition for entering a coalition with Merkel, Schaeuble is likely to continue in his current position.
* For the SPD, much will depend on party chairman Sigmar Gabriel, who is said to have his eye on the labor ministry, but could also opt for foreign or even finance. He could also decide to opt out of government and take over the SPD leadership in parliament, though this would probably meet resistance from the party and incumbent Frank-Walter Steinmeier who seems keen to stay put.
* Steinmeier may have trouble resisting pressure to join the cabinet. His name has been floated as a potential foreign or finance minister. He could also run a new ministry grouping energy and infrastructure. SPD parliamentary whip Thomas Oppermann has also been mentioned as a possible finance minister, though interior or defense look like better fits. ECB board member Joerg Asmussen is a dark horse choice for the finance ministry.
* Were the SPD to claim the finance ministry, one source said Merkel might want to shift Schaeuble to the foreign ministry. But the extensive travel involved in this post would be a challenge for the wheelchair-bound Schaeuble.
* Apart from Schaeuble, the other member of Merkel's CDU who
is seen as a lock for the cabinet is Ursula von der Leyen, who may be keen on the foreign ministry. If she were to get this post, or move into the parliamentary leadership role held by Volker Kauder, many would see it as a sign she was being groomed to succeed Merkel.
* It remains unclear whether the SPD's pre-election proposal to group together responsibility for all energy-related issues in one ministry -- they are currently shared between the economy and environment ministries -- will see the light of day. Merkel is likely to want someone she trusts to oversee her "Energiewende" shift from nuclear to renewable power.
(Compiled by Berlin bureau)