By Michelle Martin and Andreas Rinke
BERLIN (Reuters) - German Chancellor Angela Merkel's conservatives and the Social Democrats (SPD) failed to conclude coalition negotiations in time to meet a self-imposed Sunday deadline but have made progress and will reconvene on Monday, SPD members said.
More than four months after a national election, Europe's largest economy and pre-eminent power-broker is in political paralysis, causing concern among investors and partner countries that policymaking on issues such as Britain's looming departure from the European Union and euro zone reform may be held up.
The conservatives and SPD had hoped to agree on Sunday to renew the "grand coalition" that has governed Germany since 2013, but disputes over healthcare and labor policy remain.
"We had a very constructive day today and we reached a lot of agreements," said SPD General Secretary Lars Klingbeil, pointing to deals on rents and real estate, digitalization and culture. He said negotiators agreed to talk again on Monday "in detail and in a focused way" about several contentious issues.
Berlin Mayor Michael Mueller, another SPD negotiator, told German broadcaster ZDF the overall package still needed to be assessed, but he was heartened by an agreement to protect renters against excessive increases in rental costs.
"We have a basis that is getting better day by day," he said.
The SPD, stung by its worst post-war result in September elections, is struggling to extract concessions that will convince its 443,000 members to approve another tie-up with conservatives.
CDU deputy Thomas Strobl told ZDF he expected the parties to reach an agreement. "We need a bit more time," he said.
Asked if the negotiations could still fail, senior conservative Reiner Haseloff told broadcaster ARD: "I don't think so. I hope not. I can't think of any topic that is insurmountable."
Merkel, in office for 12 years, had said earlier on Sunday that her conservatives faced tough negotiations with the SPD, adding: "We did good groundwork yesterday but there are still important issues that need to be resolved."
The parties agreed on Sunday to invest more than 2 billion euros in social housing by 2021, to spend up to 12 billion euros on expanding broadband and to channel 33 billion euros to municipalities for various projects including childcare.
They have ticked off migration, energy and agriculture in recent days too but the most contentious issues -- labor rules and healthcare -- have yet to be resolved.
As he arrived for talks, SPD leader Martin Schulz said the sides had edged closer on many issues but were still clashing over the SPD's bid to bar employers from imposing short-term employment contracts without justification. The two sides are also still at odds over the SPD's call to replace Germany's dual public-private healthcare system with one system for all.
The SPD sees progress on the two issues as crucial to persuade left-wing members of the party and others who want to avoid another awkward partnership with Merkel.
"I think agreements are possible but they still haven't been reached," Schulz said. "Ultimately it's necessary to take the time you need to create a stable foundation for a stable government."
The conservatives have rejected SPD calls for sweeping reform of health insurance and talks are now expected to focus on improving public healthcare, such as by changing billing rules for doctors, who earn more by treating private patients.
In labor market policy, Merkel's bloc does not want to ban fixed-term contracts, but has offered to prevent the repeated renewal of such short-term employment contracts as a compromise.
Tradeoffs are still being made. Negotiators had agreed last week to gradually abolish Germany's air transport tax but the proposal could still be dropped from the final agreement, a source familiar with the talks said late on Sunday.
SPD negotiator Manuela Schwesig, aware of the need to push through distinctive SPD policies to sell the deal to the party at large, said: "We've promised our members that we'll negotiate until the other side squeals, and we'll do that."
(Additional reporting by Thorsten Severin and Andrea Shalal; Writing by Michelle Martin and Andrea Shalal; Editing by Matthew Mpoke Bigg)