Chancellor Angela Merkel said she would prefer a new election to ruling with a minority after talks on forming a three-way coalition failed overnight, but Germany's president told parties they owed it to voters to try to form a government.
The major obstacle to a three-way deal was immigration, according to Merkel, who was forced into negotiations after bleeding support in the Sept. 24 election to the far right in a backlash at her 2015 decision to let in over 1 million migrants.
The failure of exploratory coalition talks involving her conservative bloc, the liberal pro-business Free Democrats (FDP) and environmentalist Greens raises the prospect of a new election and casts doubt about her future after 12 years in power.
Merkel, 63, said she was sceptical about ruling in a minority government, telling ARD television: "My point of view is that new elections would be the better path." Her plans did not include being chancellor in a minority government, she said after meeting President Frank-Walter Steinmeier.
Steinmeier said Germany was facing the worst governing crisis in the 68-year history of its post-World War Two democracy and pressed all parties in parliament "to serve our country" and try to form a government.
His remarks appeared aimed at the FDP and the Social Democrats (SPD), who on Monday ruled out renewing their "grand coalition" with the conservatives.
"Inside our country, but also outside, in particular in our European neighbourhood, there would be concern and a lack of understanding if politicians in the biggest and economically strongest country (in Europe) did not live up to their responsibilities," read a statement from Steinmeier, a former foreign minister who has been thrust centre-stage after taking on the usually largely ceremonial head of state role in March.
Steinmeier's intervention suggests he regards a new election - desired by half of Germany's voters according to a poll - as a last resort. The SPD has so far stuck to a pledge after heavy losses in the September election not to go back into a Merkel-led broad coalition of centre-left and centre-right.
Merkel urged the SPD to reconsider. "I would hope that they consider very intensively if they should take on the responsibility" of governing, she told broadcaster ZDF, adding she saw no reason to resign and her conservative bloc would enter any new election more unified than before.
"If new elections happened, then ... we have to accept that. I'm afraid of nothing," she said.
Business leaders also called for a swift return to talks.
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 in the morning.
Both the euro and European shares later recovered from early selling, while German bond yields steadied near 1-1/2 week lows, as confidence about the outlook for the euro zone economy helped investors brush off worries about the risk of Germany going to the polls again soon.
FEAR OF FAR-RIGHT GAINS Earlier, Merkel got the strong backing of her CDU leadership.
Josef Joffe, publisher-editor of Germany weekly Die Zeit said she could rely on CDU support for now, but added: "I will not bet on her serving out her entire four-year term." The main parties fear 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 a repeat election would return a similarly fragmented parliament.
A poll published on Monday showed a new election would bring roughly the same result as the September election, with the Greens set to see the biggest gains.
If Germans voted next Sunday, Merkel's conservatives would get 31 percent, the SPD 21 percent, the Greens and the AfD both 12 percent, the FDP 10 percent and the Left party 9 percent, the Forsa survey for RTL television showed.
This compares with the election result of 32.9 percent for the conservatives, 20.5 percent for the SPD, 12.6 percent for AfD, 10.7 percent for FDP, 9.2 percent for the Left party and 8.9 percent for the Greens.
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.
Any outcome in Germany is, however, likely to be more consensus driven. "The problem is stagnation and immobility, not instability as in Italy," said Joffe.
The unravelling of the German talks came as a surprise since the main sticking points - immigration and climate policy - were not seen as FDP signature issues.
Responding to criticism from the Greens, FDP vice chairman Wolfgang Kubicki said a tie-up would have been short-lived. "Nothing would be worse than to get into a relationship about which we know that it will end in a dirty divorce," he said.
Even if the SPD or the FDP revisit their decisions, the price for either party to change its mind could be the departure of Merkel, who since 2005 has been a symbol of German stability, leading Europe through the euro zone crisis.
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.
Germany's political impasse could also complicate and potentially delay the Brexit negotiations - Britain has just over a year to strike a divorce deal with the EU ahead of an exit planned for March 29, 2019.
"It's not in our interests that the process freezes up," Macron told reporters in Paris, adding he had spoken with Merkel shortly after the failure of talks.