German Chancellor Angela Merkel's conservative union bloc struck a government deal with the centre-left Social Democrats (Reuters)

Germany's two main political parties have agreed the terms of a "grand coalition" deal that gives the green light to Chancellor Angela Merkel being sworn in for a third term.

Merkel's conservative union bloc, including the Christian Democrats (CDU) and its Bavarian sister CSU, struck an agreement with the centre-left Social Democrats (SPD) after two months of negotiations.

Merkel secured an overwhelming victory in Germany's elections in September, winning 41.5% of the vote. However her previous coalition partner, the pro-business Free Democratic Party (FDP), crashed out of Parliament, forcing the chancellor to negotiate with her main rival or face a possible leftist grand coalition including the SPD, The Greens and the far-left Die Linke.

The breakthrough came early in the morning at the end of a "marathon" session of talks that lasted more than 17 hours.

"We negotiated hard till the end," SPD general secretary Andrea Nahles told Deutsche Welle newspaper.

The SPD secured some key concessions from Merkel, including the introduction of a mandatory national minimum wage, changes to dual citizenship and retirement rules.

"The Social Democratic signature on this coalition agreement is everywhere," senior Social Democratic lawmaker Karl Lauterbach said. "We succeeded on the most important points"

Merkel had already governed a grand coalition supported by the SPD in her first term. The agreement was however unpopular with the centre-left electorate and resulted in the Social Democrats suffering a crashing electoral defeat in 2009.