By Markus Wacket and Holger Hansen

BERLIN (Reuters) - The leader of Germany's Social Democrats (SPD) played down hopes on Monday for swift progress in coalition talks with Chancellor Angela Merkel's conservatives, an SPD source said, amid continued disagreement over several issues including refugees.

Four months after both Merkel's party and the SPD performed worse than expected in a federal election, they are trying to iron out policy differences and form a "grand coalition" like the one that led Germany from 2013 to 2017.

Merkel, who failed to form a government in talks with two smaller parties late last year, needs the talks with the SPD to succeed in order to secure a fourth term as chancellor.

In meetings with his party leadership on Monday, SPD chief Martin Schulz expressed scepticism about the first round of coalition talks with the conservatives and highlighted the main disputed issues, the SPD source said.

Those include family reunions for refugees allowed to remain in Germany, health insurance and employment policy.

Schulz said it was unclear what kind of compromises or agreements could be made in those areas, the source said.

SPD parliamentary floor leader Andrea Nahles said late on Monday that both sides did not manage to find common ground on the matter of family reunions for refugees with only limited protection against deportation.

The family reunion issue is particularly sensitive after the previous Merkel-led grand coalition agreed in 2015 to take in more than one million refugees, many fleeing conflicts in the Middle East.


The SPD favours a more lenient approach towards those refugees seeking to bring to Germany family members whom they left behind in places like Syria and Iraq.

But the conservatives now hew to a tougher line on immigration to avoid losing more votes to the far-right Alternative for Germany (AfD), which surged into parliament for the first time in the September election.

Although the talks on family reunions broke off overnight without agreement, SPD deputy leader Malu Dreyer had earlier sounded a more optimistic note than Schulz, saying the parties were in the "final stages" of clinching an accord on this issue.

Dreyer told Deutschlandfunk radio there was a will among the negotiators "that we really reach an agreement today".

Representatives of the SPD and conservatives told Reuters that suggestions to include a pledge in the coalition deal to raise taxes on petrol, gas and heating oil had met with strong resistance during talks on Sunday.

The idea had been to use the extra revenues to reduce the cost of electricity or promote environmentally-friendly fuels. But the Christian Social Union (CSU) - the Bavarian sister party of Merkel's conservatives - was especially concerned that higher prices for heating oil could harm their chances in Bavaria's regional election this year, the sources said.

Otherwise, they said negotiations in the working group that focuses on the environment and energy had been constructive. The group supported an extra paragraph on energy efficiency to be added to the coalition blueprint, which would also ensure that building renovations were tax-deductible.

(Additional reporting by Paul Carrel and Joseph Nasr; Writing by Michelle Martin; Editing by Mark Heinrich)

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