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Austria's President Alexander Van der Bellen (C) walks in front of Chancellor Christian Kern (L) and Vice Chancellor Reinhold Mitterlehner on his first day in office at Hofburg palace in Vienna, Austria, January 26, 2017. REUTERS/Leonhard Foeger

(reuters_tickers)

VIENNA (Reuters) - Talks between Austria's two centrist coalition parties aimed at setting policy priorities and averting a government collapse are making progress but could drag into the weekend, Chancellor Christian Kern said on Friday.

Kern, a Social Democrat, said on Tuesday he wanted an agreement by Friday on concrete policies for the remaining year and a half of the coalition's term, suggesting that failure to reach a deal by then would mean the end of the coalition and prompt a snap parliamentary election.

He has since rowed back on those comments, saying there will be no snap election, but the two sides have continued to hold all-day meetings aimed at hammering out an agreement that have run into the small hours.

A snap election would most likely play into the hands of the far-right Freedom Party (FPO), which is running first in opinion polls, helped by widespread frustration at a coalition government that many voters believe is ineffective.

"Little time remains for what we hope to achieve and it could very well be that this lasts beyond the coming day," Kern told reporters as talks broke after midnight. "There was progress on some points. There was no progress on others."

Kern, who took over as head of the government in May, has sought to project a more modern and dynamic image than his predecessor Werner Faymann, who resigned after an FPO candidate won the first round of the presidential election.

At an event this month, he announced a 150-page list of proposals on issues ranging from cutting unemployment to reforming education.

Kern's junior coalition partners from the conservative People's Party have countered with their own proposals, many of them on security and immigration, including halving a cap on asylum claims set at 35,000 for this year and banning public servants from wearing Muslim headscarves.

The government has given few details of the talks and a spokeswoman for Kern said the situation was changing hourly, but Austrian media have said other points being discussed include tax relief for employers and making working hours more flexible.

(Reporting by Francois Murphy; Editing by Angus MacSwan)

Reuters