Reuters International

German Chancellor Angela Merkel speaks at the annual meeting of the German Sparkasse savings banks in Duesseldorf, Germany, April 27, 2016. REUTERS/Wolfgang Rattay

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BERLIN (Reuters) - Chancellor Angela Merkel's Christian Democrats (CDU) look set to form a state government with the Greens in prosperous southwestern Germany, creating a team that could be a model for a national coalition next year.

The two parties have agreed on their main policies in the state of Baden-Wuerttemberg and will discuss remaining issues on Friday, the source in the state government in Stuttgart said.

"At the weekend, the assignment of portfolios and which party will take which ministry will be decided on," the source said.

The conservative CDU and the environmentalists long seemed to be unlikely bedfellows, but the Greens' strength in several states and the weakness of the Social Democrats - Merkel's junior partner in Berlin - mean such a coalition in Berlin could end up being mathematically possible.

Baden-Wuerttemberg, home to carmakers Daimler and Porsche, had a Greens-led coalition before its recent election and the CDU would be junior partner in the new team, an embarrassment in a state that was a CDU stronghold for decades.

Hesse state, home to Germany's financial capital Frankfurt, has a CDU-led coalition with the Greens and the party leaders there - CDU state premier Volker Bouffier and the Green economics minister Tarek Al-Wazir - say it could work in Berlin.

"I can easily imagine that we could talk reasonably with Angela Merkel," Al-Wazir told Der Spiegel magazine.

The SPD seemed to be the more natural partner for the Greens, he said, but their big policy differences with the CDU "in a crazy way can make governing easier," he said.

Greens national leader Cem Oezdemir, who wants to be the party's lead candidate next year, said this month that the SPD seemed increasingly unable to form a national government - a hint he might also look to the CDU as a partner.

The Greens became the strongest party in a state for the first time in their history last month in the election in Baden-Wuerttemberg, gaining 30.3 percent of votes. The CDU suffered losses and ended up with 27 percent there.

The environmentalists formed their first government there after the 2011 state election, when it came in second to the CDU but was able to forge a coalition with the third-placed SPD.

Merkel currently governs in Berlin with the SPD, but this right-left "grand coalition" of the two large parties is usually a last resort in German politics.

A surging far-right party, the anti-immigrant Alternative for Germany (AfD), looks set to make it harder for mainstream parties to form coalitions after next year's election.

The established parties have all said they do not want to work with the AfD.

(Reporting by Hans-Edzard Busemann; Writing by Michelle Martin; Editing by Maria Sheahan and Tom Heneghan)

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