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Germany's Free Democratic Party (FDP) leader, Christian Lindner, gives a statement as he arrives at the Reichstag building for exploratory talks about forming a new coalition government in Berlin, Germany, November 7, 2017. REUTERS/Hannibal Hanschke

(reuters_tickers)

By Michael Nienaber and Andreas Rinke

BERLIN (Reuters) - Two German parties aiming to join Chancellor Angela Merkel's conservatives in a governing coalition dropped demands on tax reforms and climate policy on Tuesday, breaking a logjam after two weeks of often tense negotiations.

With the three camps still divided on several issues, the pro-business Free Democrats (FDP) gave some ground, saying they would accept more modest income tax cuts than a campaign pledge of 30-40 billion euros (27-35 billion pounds) of relief.

The party would focus instead on securing the abolition of the solidarity tax that Germany introduced after reunification in 1990 to support poorer eastern states, and on tax relief for families and smaller businesses, its leader Christian Lindner told reporters.

He was speaking before Tuesday's round of exploratory coalition talks in parliament.

The ecologist Greens said they would no longer insist on fixed dates to shut down coal-fired power stations and to ban cars with internal combustion engines.

The three-way coalition the parties are trying to form is untested at national level, and the negotiations follow a fracturing of the vote in national elections in September, when Merkel's conservatives bled support to the far right.

Should the talks stall, Germany would face a lengthy period of uncertainty at a time when many in the European Union are looking to its biggest economy for leadership on issues ranging from euro zone governance to trans-Atlantic relations.

Merkel, who is seeking a fourth term, said on Monday that immigration and climate policy were the most contentious topics in the exploratory talks, which she hoped to advance to full-blown negotiations on Nov. 16.

COMPROMISE

There is broad support among her conservatives - comprising the Christian Democrats (CDU) and their Christian Social Union (CSU) Bavarian allies - for tax reforms.

The CDU/CSU alliance also reached a deal on migrant policy last month.

The main sticking point to a broader deal on that front is a conservative proposal to cap at 200,000 a year the number of migrants Germany would accept on humanitarian grounds. The Greens reject such a limit, which they say is unconstitutional.

Also complicating the path to a coalition deal, negotiators will need to seek approval from their parties before proceeding to full-blown talks.

A crucial test will be a Greens party conference on Nov. 25, when party leaders will seek the blessing of their base.

Signalling a readiness to compromise, Greens co-leader Simone Peter told Rheinische Post newspaper: "For us, it doesn't matter if the last coal-fired power station is off the grid in 2030 or 2032. That's where we are pragmatic."

But it was crucial to agree on further climate protection measures to cut Germany's CO2 emissions by 40 percent from 1990 levels by 2020, as Merkel had promised.

Greens Co-leader Cem Ozdemir signalled readiness to compromise on car policy after an emissions scandal at Germany's leading automaker Volkswagen<VOWG_p.DE> plunged the industry into crisis.

"It's clear to me that we alone cannot enforce the end date of 2030 for the approval of combustion engines," Ozdemir told Stuttgarter Zeitung and Stuttgarter Nachrichten newspapers.

(Writing by Joseph Nasr; Editing by Paul Carrel and John Stonestreet)

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