Berlin  - German Chancellor Angela Merkel of the Christian Democrats (CDU) and her new political partners have agreed to the broad outline of the next government after negotiations stretching into the early hours of the morning, coalition sources said on Friday.

Merkel held talks with the Free Democrats' (FDP) leader Guido Westerwelle and Horst Seehofer of the CDU's Bavarian Christian Social (CSU) sister party, hammering out details of the new government charter.

Westerwelle is widely touted for the role of foreign minister. Wolfgang Schaeuble of the CDU, who is currently the interior minister has been proposed for the finance ministry, where he would control the government purse strings.

All that remained to be finalized after the late-night session were details regarding healthcare policy and taxation - two of the key points of discussion between the parties.

The government is due to be sworn in next week, after Merkel's CDU and the FDP won a majority in last month's general election.

During the Thursday night talks, the parties agreed to grant statutory health insurers greater autonomy to set contributions, settling differences between the parties over healthcare funding.

There is a controversial public debate over whether to grant people different levels of healthcare provision according to their ability to pay - a proposal which the free-market FDP is in favour of.

Currently, Germany's 180-odd health insurers are set a fixed contribution rate of 14.9 per cent, paid in equal measure by employers and employees.

This money is aggregated in a national health fund, where it is topped up by tax-funded state contributions and distributed to the insurers who settle individuals' healthcare bills.

CDU, CSU and FDP had agreed earlier to increase individual contributions to an insurance covering care for the elderly.

During three weeks of coalition talks, CDU, CSU and FDP have struggled to reach political compromises in key areas including tax cuts, which they promised during the election campaign without taking into account budget constraints.

The parties were forced to reject plans for a "shadow budget," an accounting trick which would have bundled billions of euros of health and labour costs resulting from the economic crisis, leaving the new government with a purged balance sheet.

Instead, the estimated 20-billion-euro (30 billion dollar) shortfall is to be funded through taxpayer contributions, thus reducing the possibility of tax cuts.

The partners also agreed to increase investment in education and research by 3 billion euros (4.5 billion dollars) annually.

CDU, CSU and FDP have also decided to extend the life of nuclear power stations beyond the year 2020, overturning a previous government decision.

Merkel has been keen for the new government to be constituted in time for celebrations marking the 20th anniversary of the fall of the Berlin Wall, on November 9. (dpa)