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By Andreas Moeser and Matthias Sobolewski
BERLIN (Reuters) - German Chancellor Angela Merkel's conservatives and the pro-business Free Democrats (FDP) said on Sunday they had narrowed their differences on tax cuts and aimed to clinch a deal for a centre-right coalition by next weekend.
After three days of intense negotiations, the parties were still at odds over the size and financing of tax cuts but experts were working through various scenarios and a senior FDP member said he expected a decision on the issue on Wednesday.
Germany's conservatives, including Merkel's Christian Democrats (CDU) and Bavaria's Christian Social Union (CSU), are trying to forge a four-year policy agenda with the FDP after together winning enough votes in September 27's election.
"By next weekend, we aim to have reached a positive conclusion," said CDU General Secretary Ronald Pofalla.
All three parties said they had called conferences for their members to approve the deal for October 25 and October 26, a move which raises the pressure to reach consensus. They also have to agree on the division of cabinet posts.
The parties have already agreed on a range of issues, from basic principles on nuclear energy to financial market regulation and several areas of foreign policy.
There is no sign so far that Merkel will adopt a more radical policy platform than she did in her four-year coalition with the Social Democrats.
FINANCE HEADACHES
Finance policy is the biggest stumbling block.
Although both the conservatives and FDP fought the election on tax relief, they are at loggerheads over details, due mainly to a bulging budget deficit in Europe's biggest economy which is emerging from its deepest recession since World War Two.
"There will certainly be relief for citizens and now we are calculating how to finance it sensibly," FDP general secretary Dirk Niebel told reporters.
One option could be a third supplementary budget for this year, two party sources told Reuters [ID:nLI628193].
Tax talks have focussed on an offer from the conservatives of cuts of about 20 billion euros ($29.84 billion), which would be some 5 billion euros more than their election pledge but way short of the FDP's promise of about 35 billion euros in relief.
Tensions between the FDP and CDU erupted on Saturday when FDP chief Guido Westerwelle threatened to break off talks if the CDU as a whole agreed with one member's description of the FDP plans as unrealistic and "not serious," media said.
Some senior conservatives think ambitious tax relief is unaffordable and want to rein in spending to finance the tax cuts plus a 30 billion euro budget hole. But Merkel has ruled out an aggressive cuts programme.
A further sticking point is the financing of Germany's health fund which needs a 7.5 billion euro cash injection.
The parties have agreed to try to extend the working lives of some nuclear power plants, but details are unclear. The Berliner Zeitung newspaper reported the extensions could last 10 years.
(Writing by Madeline Chambers; Editing by Jon Hemming)

Reuters