SPD party members still need to formally approve coalition talks before they can begin.
After 18 hours of talks and still no agreement in sight between Merkel s conservatives and the centre-left Social Democrats, tired negotiators said a result would likely not emerge before dawn.
"I walked into this house over 24 hours ago - then, I was not sure that it would succeed, and I was only sure that it was a pretty big mission", Merkel said of the conclusion to the talks.
Merkel struck a deal with the Social Democrats on Friday to open coalition talks after months of uncertainty about her political future. It was n that possibility of forging a new great coalition with Social Democrats, like one that has ruled in Germany for eight of last 12 years, was resurrected.
She had until Friday been unsuccessful in forming a new government since the vote in September.
The Chancellor was eager to avoid any repeat elections or attempt at a minority government.
The prospective partners have governed Germany together for the past four years but Schulz, Merkel's defeated challenger in Germany's September 24 election, initially said after the Social Democrats crashed to a disastrous result that they would go into opposition.
Lawmakers also agreed to maintain investments in transport "at least at their current level" in the paper, while Germany's federal states will receive increasing subsidies of up to 1 Euro billion per year by the end of 2021 for communal infrastructure projects.
Sunday's talks on the terms of a new "grand coalition" involve 39 negotiators (13 from each party), and will conclude with each party issuing a declaration outlining their key demands.
Now it's Merkel's last chance to form a majority government, this time in "grand coalition" with the socialists.
But party leaders were in a buoyant mood on Friday morning.
The SPD's youth wing chief Kevin Kuehnert told Zeit Online that he would embark on a national tour to press his case for opposing a new grand coalition before a September 21 party congress.
"Although I have to say, with the the exception of a small group of people around the president - and the president himself - the rest of Washington seems to by trying desperately to maintain relations with Europe and Germany on an even keel", he said.
Though a challenger has yet to come forward, impatience is growing in Christian Democrat ranks about Merkel's tendency to manage crises as they arise rather than presenting a vision the party can rally behind and sell to voters.
But the breakdown of coalition talks in November has put moral pressure on Mr Schulz to think again, forcing him to perform an embarrassing U-turn.
While the main issues were refugees, climate goals, social security, and the relationship with Europe, taxes and the ability to pay for new programs appear to have been the sticking point overnight. "So the question, for instance, will be whether she will stay for the whole term or whether she will actually build a successor and hand over to that person".