Germany's centre-left Social Democrats voted Sunday to begin formal coalition talks with Chancellor Angela Merkel's conservatives, bringing Europe's top economy a step closer to a new government after months of deadlock.

At a special party congress in the western city of Bonn, 372 out of 642 delegates (56 percent) backed SPD chief Martin Schulz's appeal to approve a preliminary coalition deal painstakingly hammered out with Merkel's CDU/CSU bloc.

The thumbs-up will come as a huge relief to Merkel, staving off the threat of snap polls or the unappealing prospect of leading an unstable minority government.

The veteran chancellor, in power for more than 12 years, said she welcomed the SPD's green light but warned that there were "many issues left to work out".

"We have a lot of work ahead of us."

The narrow vote victory also means a reprieve for Schulz, who had staked his political future on a "yes" outcome, despite initially rejecting another stint as Merkel's junior coalition partner.

"We are relieved, the result shows that we had to fight for this majority," Schulz said.

The vote, which was closely watched in Germany and abroad, paves the way for negotiators to launch in-depth talks that should lead to an official coalition agreement in several weeks.

Merkel said the first meetings on how to organise those talks would start Monday.

But another make-or-break hurdle looms before she can clinch a fourth term, as Schulz has pledged to give the SPD's 440,000 rank-and-file party members the final say on any formal coalition "contract".

If the deal is approved, a new government could be in place by mid-March at the earliest -- nearly six months after September's tricky election.

- Europe waiting -

Sunday's breakthrough is likely to be welcomed in capitals across Europe, eager to see an end to a political impasse in a pivotal member state that has left key EU policy decisions on hold.

French President Emmanuel Macron has been openly rooting for a repeat grand alliance in Berlin given the enthusiasm among the pro-EU SPD for his EU reform plans, including his more ambitious proposals to install a eurozone budget and finance minister.

Macron "is waiting for a partner," Schulz said in an impassioned speech to delegates ahead of the vote.

He urged the SPD to seize the chance to help drive deeper EU integration and counter the rise of right-wing populists across the continent.

"Only a strong and united SPD can make our country and Europe stronger," he said.

The European Commission hailed the SPD's "yes" vote, with EU Economic Affairs Commissioner Pierre Moscovici praising the "sense of responsibility" shown by the Social Democrats.

The closer-than-predicted result however underlined the SPD's lack of enthusiasm for the coalition blueprint thrashed out earlier this month, which critics said contained too many concessions to the CDU/CSU.

- Scepticism -

Germany has been stuck in political limbo since September's inconclusive general election saw mainstream parties bleed support to the far-right AfD, which tapped into anger over Merkel's open-door refugee policy.

Stung by his party's worst result in decades, Schulz initially vowed to go into opposition but then caved to pressure to reconsider after Merkel's attempt at a novel tie-up with two smaller parties collapsed in November.

The U-turn angered many grassroots SPD supporters, who believed some time on the opposition benches would help the 150-year-old party regain its fighting spirit.

Resistance to a renewed Merkel alliance was loudest among the SPD's left and youth wings, who complained the preliminary coalition agreement fell short of campaign pledges.

The 28-page document that lays the basis for future government policies promises more spending on childcare and education as well as joining France in its push to overhaul the bloc.

But the SPD failed to secure a tax hike for the rich or a restructuring of the country's two-tier healthcare system -- two key campaign promises.

Schulz on Sunday vowed to extract more concessions in the formal coalition talks.

He also pledged to resist the CSU's demand to cap migrant arrivals at 200,000 a year and promised that any future coalition government would be put up for review after two years.

Merkel, often dubbed the world's most powerful woman, has been hamstrung on the global stage as the domestic drama has played out.

Commentators say her struggles to form a new government have damaged her political standing and she is increasingly described as entering the twilight of her rule.