German Chancellor Angela Merkel speaks at the annual congress of the Federation of German Industry (BDI) on June 20, 2017 in Berlin, Germany.

German Chancellor Angela Merkel said Monday her efforts to form a three-way coalition government had failed, thrusting Germany into a political crisis and pushing Europe's largest economy closer to a possible new election.

The pro-business Free Democrats (FDP) unexpectedly pulled out of more than four weeks of negotiations with Merkel's conservative bloc and the ecologist Greens, citing irreconcilable differences.

The euro hit a two-month low against the yen soon after FDP leader Christian Lindner said on Sunday that his party was withdrawing from the talks as the three would-be partners could not find common ground on key issues.

A tired looking Merkel said she would stay on as acting chancellor and would consult with President Frank-Walter Steinmeier on how to move forward, adding that a deal had been

within reach.

"It is a day of deep reflection on how to go forward in Germany," Merkel told reporters. "As chancellor, I will do everything to ensure that this country is well managed in the difficult weeks to come."

It was a sobering moment in the career of a woman who during 12 years in power became a symbol of stability, leading the euro zone during its debt crisis and building compromise within the European Union on a deal with Turkey to stem migrant arrivals.

Merkel was weakened after a September election as voters angry with her decision in 2015 to open Germany's borders to more than a million asylum seekers punished her conservatives by voting for the Alternative for Germany (AfD) far-right party.

The break down of the talks leaves Germany with two unprecedented options in the post-World War Two era: Merkel forms a minority government, or the president calls a new election if no government is formed.

The center-left Social Democrats (SPD), Merkel's current coalition partners who were the second-biggest party in the election, have ruled out a repeat of an alliance with her conservatives, who won the vote but were left with fewer seats.

There is little appetite for a new election. The main parties fear that the AfD would win more than the almost 13 percent of votes it secured to enter parliament for the first time as the third-biggest party.