Angela Merkel's party won a narrow victory in last month's pollAngela Merkel is to become Germany's first woman chancellor under a deal agreed between her Christian Democrats (CDU) and the Social Democrats (SPD).
Mrs Merkel confirmed the deal at a news conference and said a CDU-SPD "grand coalition" would have to create jobs and push through economic reforms.
Under the deal, the SPD will take eight ministerial posts, against a reported six for the CDU and their CSU allies.
It is unclear whether opponent Gerhard Schroeder will be in the coalition.
Both the former Chancellor Mr Schroeder and Mrs Merkel had laid claim to the chancellery after a tight election on 18 September.
The "grand coalition" deal must still be approved by both parties and parliament.
Further CDU-SPD coalition talks are being held. The two parties have already held three rounds of what they called exploratory talks.
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This is quite a dissapointing turn, since it will force the conservative Christian Democrats into a dubious coalition with Schroeder's Social Democrats. Mrs. Merkel will be hampered in her ability to institute the kinds of reforms she would like to institute in the German Republic. She has quite an uphill battle.
But there is a hopeful sign, and that is to be located in the German electorate itself. The Christian Democrats are traditionally pro-family, and, with its Bavarian equivalent, the Christian Social Union, favorable to a more active role that the Church can play in social and cultural affairs, countering the hard secularism of the Social Democrats. The fact that the Christian Democrats did so well in the Bundestag (though not as well as at first expected) is a hopeful sign that the course of radical secularization in Europe could be stemmed. Let's wait and see what becomes of this hopeful trend.