German Chancellor Angela Merkel and Social Democratic leader Martin Schulz have said they are confident they will be able to reach agreement on a new coalition government.
Although both parties have agreed to a media blackout while talks are underway, reports suggest both have agreed to drop the 2020 carbon reduction target, establish national high-speed internet infrastructure by 2025 and to implement skilled migration targets.
Germany has been in political paralysis since a Sept 24 election in which Merkel failed to win a clear majority - in part due to the rise of the far-right and anti-immigration Alternative for Germany (AfD) which took millions of votes from all major parties.
Participants have described the negotiations as "good", but SPD leaders need to convince their party members as they are offering them a vote on January 21 on whether to proceed.
Both Merkel and Schulz went into the talks Thursday warning of "big obstacles" ahead, and major sticking points in the red-eye negotiations that followed were immigration, finances and health policy, sources said.
Merkel has ruled with the SPD in a sometimes awkward grand coalition in two of her three previous terms in office, including in the last parliament from 2013-2017.
Merkel whose position was weakened in September after an inconclusive result in the German elections said: "Of course we also have in mind that we have to create a good policy platform for our country".
Aware the world was watching, she was unwilling to allow talks break up without agreement.
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"So it's going to be a tough day", the chancellor said in a brief statement before joining leaders of the Social Democrats (SDP), along with her conservative Christian Democrats (CDU) and their Bavarian-based Christian Social Union (CSU) allies, for the exploratory round.
"The European Union's member countries need more cohesion, not less", Schulz told reporters.
After a gruelling all-night session - fuelled by currywurst - Angela Merkel appears to have clinched the deal.
But a decision by the SPD conference against signing up for another four years as a member of a Merkel-led coalition could either lead to the formation of a minority government or trigger fresh elections, throwing into doubt her future leadership. That means Germany is unlikely to have a new government until late March at the earliest.
Mrs Merkel admitted there had been hard "blockages" during the Berlin talks.
Until now the CDU/CSU has opposed key SPD proposals: to raise the top tax rate, merge private and public healthcare, and reinstate provisions for some refugees to bring over their families.
Schulz also stressed the importance to the SPD of reaching an agreement for a makeover of the European Union, with his party wanting Berlin to back French President Emmanuel Macron's European Union reform plans. "This country can not afford another four years under this woman". When the math didn't work, a grand coalition was the fallback.
"Germans have been waiting more than 100 days for a government and they've had enough", thundered the Bild tabloid, asking Dr Merkel: "Where is your plan?"