Germany's Greens rule out further coalition talks with Merkel

* Greens say see too many policy differences with Merkel bloc

* Merkel continues talks with Social Democrats

* Third round of talks expected on Thursday

* Most Germans would like to see a 'grand coalition' with SPD

By Alexandra Hudson

BERLIN, Oct 16 (Reuters) - Germany's Greens ruled out any further coalition talks with Angela Merkel's conservatives early on Wednesday, leaving the chancellor to focus on discussions with the centre-left Social Democrats (SPD) in her efforts to form a new government.

After almost six hours of detailed policy discussions the Greens concluded they simply did not have enough in common with Merkel's conservative bloc in areas such as energy, climate targets and taxation, to make further discussions fruitful.

"After these talks the Greens do not find themselves able to enter coalition talks," said Hermann Groehe, second-in-command of Merkel's Christian Democrats (CDU).

"We will approach the representatives of the SPD tomorrow with a view to scheduling the explorative talks we had already eyed for Thursday."

Merkel needs to find a partner for her third term after she won September's election but fell short of an absolute majority. Polls suggest the German public would like her to enter full-blown negotiations with the SPD, and aim for a repeat of the 'grand coalition' in which she governed from 2005-2009.

The SPD, however, are playing hard to get. Its representatives spoke to the CDU and its Bavarian sister party, the Christian Social Union (CSU), for eight hours on Monday, and while stating their willingness to talk again, they also said they could also say no to Merkel.

The prospect of months of coalition talks worries Germany's European partners, who fear delays to crucial decisions for fighting the euro zone crisis, such as a plan for banking union.

An eventual grand coalition is expected to boost spending on investment in Germany, helping shore up Europe's largest economy and increasing trade with the struggling euro zone, helping address imbalances.

Although the CDU/CSU and Greens were ultimately unable to bridge differences, the fact that the former arch-enemies spoke at all and for so long is already groundbreaking and signals a new political culture in Germany.

"I want to stress that even in areas where there were differences, there were none which we would have viewed as insurmountable," said Groehe.

However, taxation appeared a major stumbling block, with the Greens anxious to fund an ambitious investment programme.

Former Greens co-chair Claudia Roth said: "We always said it was about seeing whether there was a solid foundation for four years of government together - and after these talks it appears there wasn't."

The policy divide with the SPD looks to be smaller.

The SPD has already signalled it could stop insisting on tax hikes if Merkel's camp can come up with other ways to pay for more investment in infrastructure, education and research, which all the mainstream parties agree is necessary.

The big sticking point is a minimum wage. In the talks on Monday, the SPD made clear it would not compromise on its demand for a nationwide wage floor of 8.50 euros per hour.

But even here, the divide between the parties is more about method than substance. Merkel agrees in principle to the idea of a wage floor, but wants this to be negotiated sector by sector, rather than imposed from above.

On a range of other issues, from how to tackle Europe's economic and financial woes to completing Germany's shift from nuclear to renewable energy, the differences are minimal.

Still, the path to an eventual grand coalition won't be smooth.

SPD leaders must take care not to appear overly eager for a deal with Merkel given deep scepticism among the party's rank and file. On Sunday, 200 senior SPD members will vote on whether to continue coalition talks, and any final decision on forming a new government will be put to a vote by the party's 472,000 members.