Angela Merkel's future was hanging in the balance last night after high stakes talks to form a new government for Germany collapsed.

Citing irreconcilable differences, the pro-business Free Democrats (FDP) pulled out of the talks, meaning Mrs Merkel will either seek to form a minority government with the Greens or a new election will be held.

"Today there was no progress but rather there were setbacks because targeted compromises were questioned," FDP leader Christian Lindner told reporters.

"The four discussion partners have no common vision for modernisation of the country or common basis of trust,” Mr Lindner said in the early hours of Monday morning, after dramatically walking out of coalition talks. “It is better not to govern than to govern badly.”

In a sombre press conference, held in the early hours of Monday morning, after talks collapsed, exhausted negotiators from the Greens, the CDU and the CSU, expressed their regret.

“We believe we were on a path where we could have reached an agreement,” Mrs Merkel, who will contact German President Steinmeier on Monday morning to work out how to proceed, said.

"It's a day of deep reflection," she said, claiming she will do everything she can to move the country forward.