Victorious Merkel must reach out to leftist rivals
* Merkel leads conservatives to strong election win
* Chancellor must convince centre-left to join coalition
* SPD may demand key cabinet posts, press for policy shift
* Grand coalition would please Germany's euro partners
By Noah Barkin
BERLIN, Sept 23 (Reuters) - Despite leading her conservatives to their strongest election result in over two decades, German Chancellor Angela Merkel now faces the unsavoury prospect of having to court her arch-rivals on the left to maintain her grip on power.
Even her political enemies admitted on Sunday night that Merkel was the big winner of the first German vote since the euro zone debt crisis erupted nearly four years ago and thrust the reserved pastor's daughter from East Germany into the role of Europe's dominant leader.
With nearly all the votes counted, Merkel's conservative bloc stood at 41.8 percent, its strongest score since 1990, and tantalisingly close to the first absolute majority in the Bundestag lower house of parliament in over half a century.
But even the 59-year-old chancellor seemed to acknowledge the difficulty of the challenge ahead, when she was asked on television whether she planned to reach out to other parties.
"Maybe we won't find anyone who wants to do anything with us," she replied.
She is likely to turn first to the Social Democrats (SPD), with whom she ruled in mostly-successful 'grand coalition' in her first term from 2005 to 2009. The SPD came second with 25.6 percent, slightly above their worst post-war result of 2009.
But this time around, the SPD will be loath to do a deal with Merkel unless she pays a high price in terms of cabinet posts and policies.
During the campaign, the centre-left party argued for a minimum wage and higher taxes on the wealthy -- both opposed by Merkel. The party could also demand the finance ministry, pushing out respected 71-year-old incumbent Wolfgang Schaeuble.
SPD Chairman Sigmar Gabriel did not categorically rule out entering talks with Merkel, but sent a signal that his party, which lost millions of supporters during the last 'grand coalition', would not roll over.
"We won't automatically go into a grand coalition," said Gabriel. "What is important are the policies."
He has called a meeting of the 150-year-old SPD's leadership on Friday to discuss options. If the party does decide to pursue coalition talks with Merkel, experts predict they could last months and be the most difficult in the post-war era.
"There are bigger differences than in 2005," acknowledged a top aide to Merkel on condition of anonymity. "If you look at the SPD programme it is far more to the left than it was then."
Still, polls show that the consensus-driven German public would welcome a right-left partnership, as would Berlin's European partners, who hope the SPD might soften Merkel's austerity-focused approach to struggling euro zone members.
Should the SPD refuse to enter talks, Merkel could turn to the environmentalist Greens, though such a partnership might prove even more fraught.
There was bitter disappointment for Merkel's allies in the outgoing government, the market-friendly Free Democrats (FDP), who suffered a humiliating exit from the Bundestag, the first time they will be absent from the chamber in the post-war era.
The Alternative for Germany (AfD), a new eurosceptic party that had threatened to spoil Merkel's victory by breaking into parliament for the first time, appeared to have come up just short of the 5 percent threshold required to win seats.
The movement's hostility to euro zone bailouts and call to cut weaker southern members loose from the currency area resonated with many crisis-weary voters and may act as a brake on Merkel's conduct of European policy.
The result leaves Merkel as one of the few European leaders to survive the debt crisis, which has seen 19 of her EU peers lose their jobs since the start of 2010.
But the chancellor faces major challenges in a new term, from bedding down her complex shift from nuclear to renewable energy, to setting out a vision for a euro zone.
She has presided over a strong recovery in the German economy and a sharp reduction in unemployment, but economists are worried that Germany could lose momentum without reforms and new initiatives to head off a looming demographic crisis.
"The biggest medium-term risk for Germany may be a lack of reforms," Citigroup analysts said in a note. "Aside from the much-needed energy reform, Germany still has a fairly rigid labour market, low service sector productivity, and large demographic challenges."
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