* Atmosphere positive, constructive at first round of talks
* Merkel's conservatives, SPD agree to more talks on Oct 14
* Europe waits as Germany may need 2 months to formgovernment
By Erik Kirschbaum and Sarah Marsh
BERLIN, Oct 4 (Reuters) - Angela Merkel's conservatives andthe opposition Social Democrats (SPD) agreed to meet again in 10days to explore forming a "grand coalition" government after aninitial three-hour meeting on Friday was called constructive byboth sides.
The German chancellor's Christian Democrats (CDU/CSU)emerged as the dominant party from the Sept. 22 election butneed a coalition partner and Friday's meeting marked the startof complex horse-trading that could last two months or more.
The SPD is seen as Merkel's most likely partner but is in nohurry to back her again after its support was decimated duringthe 2005-09 grand coalition. Merkel will meet leaders of theGreens party, another potential coalition partner, on Thursday.
The announcement that a second round of exploratorydiscussions with the SPD would take place on Oct. 14 was notsurprising but that and positive comments from participantssuggested there may be enough common ground between Germany'stwo main parties for formal coalition talks in October thatcould lead to a new government next month.
"The atmosphere was good, business-like and constructive,"Hermann Groehe, Merkel's deputy in the CDU, told reporters."Both sides have in mind the major challenges lying ahead forour country and Europe. There is a lot of common ground there."
A leader of the SPD delegation, Andrea Nahles, also usedunexpectedly positive language on Friday after a bitter electioncampaign, saying there was "an open-minded atmosphere" and manycommon positions along with issues where there are differences.
Until now many SPD leaders had expressed doubts and outrightopposition about a grand coalition with Merkel. Many grass rootsSPD supporters are also opposed, fearing Germany's oldest partywould further lose its identity under the popular chancellor.
The SPD plans to allow its 472,000 members to vote on anycoalition agreement with Merkel's conservatives, anunprecedented and risky move that could complicate or even doomthe formation of a grand coalition government.
EUROPE WATCHING AND WAITING
European partners are watching the political manoeuvring inBerlin closely, concerned that delay could push back EU-widedecisions on financial crisis-fighting measures such as anambitious plan for a banking union. German agreement isessential to create a pan-European mechanism to recapitalise orwind down troubled banks, with a joint financial backstop.
At stake in the preliminary talks is whether the twomainstream parties can agree on tax measures, a minimum wage andinfrastructure investment to rebalance Europe's biggest economy,and form a government with broad enough public backing to tacklethe euro zone's banking and debt problems.
The CDU/CSU will nevertheless hold a similar round ofpreliminary talks with the Greens party on Thursday. Aconservative-Greens government is considered unlikely butMerkel's party needs that option to put pressure on the SPD.
"We only identified the major topics and didn't go intodetails today," said Nahles, the left-wing general secretary ofthe SPD. "We identified some consensus points but we also talkedabout controversial points and identified differences, andfurther talks are thus needed."
The two parties disagree on key areas such as taxation,wages and investment. While the SPD campaigned for higher taxeson the rich, the conservatives ruled out increasing any taxes,but they could compromise by agreeing to crack down on taxevasion and closing loopholes for big corporations.
The centre-left SPD are expected to make introducing anational minimum wage a condition for a coalition. Merkelprefers "wage floors" agreed by region or sector but she mayhave to accept a blanket minimum to get a deal, perhaps not ashigh as the 8.50 euros ($11.60) an hour the SPD wants.
The two parties may also agree on ramping up publicinvestment in transport, energy and communications networks - anSPD demand - and on curbing costly renewable energy subsidies.
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- Angela Merkel