Merkel seals coalition deal, eyes tax relief

German Chancellor and head of the conservative Christian Democratic Union (CDU) Angela Merkel talks to leader of the German Free Democrats (FDP) Guido Westerwelle before coalition talks in Berlin, October 23, 2009.

BERLIN (Reuters) - German Chancellor Angela Merkel sealed a coalition deal with the Free Democrats (FDP) early on Saturday after marathon talks, a leader in her conservative bloc told journalists.

The agreement paves the way for a new center-right government to take office next week, roughly a month after Merkel's conservatives and the FDP won a parliamentary majority in a federal election.

"We've reached a good agreement and it's a very good day for Germany," said designated Transport Minister Peter Ramsauer, a leader in the Christian Social Union that is the Bavarian sister party to Merkel's Christian Democrats.

The talks dragged on for more than 12 hours into the early morning hours of Saturday as the incoming government struggled to reconcile their promise of billions of euros in tax cuts with a separate pledge to get Germany's deficit, swelled by massive stimulus packages, back under control.

(Reporting by Erik Kirschbaum and Noah Barkin)