Germany was plunged in a political crisis after talks to form a new government collapsed, threatening Chancellor Angela Merkel’s fourth term in office.
The failure of the high-stakes talks could force Germany to hold snap elections as there seemed no viable coalition in sight.
Merkel, whose liberal refugee policy has proved deeply divisive, had been forced to seek an alliance with an unlikely group of parties after September elections left her without a majority.
But following more than a month of grueling negotiations, the leader of the pro-business FDP, Christian Lindner, walked out of talks overnight, saying there was no "basis of trust" to forge a government with Merkel's conservative alliance CDU-CSU and ecologist Greens.
"It is better not to govern than to govern badly," he said, adding that the parties did not share "a common vision on modernizing" Germany.
Voicing regret for the FDP's decision, Merkel vowed to steer Germany through the crisis.
"As chancellor... I will do everything to ensure that this country comes out well through this difficult time," she said.
News magazine Der Spiegel called the breakdown in negotiations a "catastrophe" for Merkel and said Germany, long seen as an island of stability in a turbulent West, was having its "Brexit moment, its Trump moment".
The negotiations, which turned increasingly acrimonious, stumbled on a series of issues including immigration policy.
Merkel's liberal refugee policy that let in more than one million asylum seekers since 2015 had also pushed some voters to the far-right AfD, which captured 12.6 percent of the vote after an Islamophobic and anti-immigration campaign.
The parties also differed on environmental issues, with the ecologists wanting to phase out dirty coal and combustion-engine cars, while the conservatives and FDP emphasized the need to protect industry and jobs.
Party chiefs had initially set a deadline of 6:00 pm (1700 GMT) on Sunday, but that passed without a breakthrough -- after already blowing through a previous target on Thursday.
The Greens angrily deplored the collapse of talks, saying they had believed a deal could be done despite the differences and accusing the FDP of negotiating in bad faith.
Merkel could now try to convince the Social Democratic Party (SPD), which has been the junior coalition partner in her government since 2013, to return to the fold.
But after suffering a humiliating loss at the polls, the party's top brass has repeatedly said the SPD's place was now in the opposition.
Merkel, who has been in power for 12 years, could also lead a minority government although she had signaled that she was not in favor of such instability.
Germany could therefore be forced to hold new elections, which would have to be called by President Frank-Walter Steinmeier.
Merkel ally Jens Spahn said he was not yet thinking about new elections and held out the possibility of teaming up with the SPD, with whom the conservatives still rule in a caretaking capacity.
“We have a capable acting government, the necessary things can get done,” he said. “There is no grounds for panic.”
Snap elections are not without peril for Merkel, who would face questions from within her party on whether she is still the best candidate to carry their banner into a new campaign.
Top-selling Bild daily said a failure to forge a tie-up -- a so-called "Jamaica coalition" because the parties' colors match those of the Jamaican flag -- put "her chancellorship in danger".
A poll by Welt online also found that 61.4 percent of people surveyed said a collapse of talks would mean an end to Merkel as chancellor. Only 31.5 percent thought otherwise.
There is however little appetite for a new election as main parties fear that the AfD would add to the votes it secured in September.
As talks dragged on without a breakthrough, Steinmeier issued a warning to parties not to recklessly force new elections.
"All sides are aware of their responsibilities. And this responsibility means not returning their mandate to voters," he said in an interview with Welt am Sonntag.
"It's bad news for Europe that the government in Germany will take a little longer," new Dutch Foreign Minister Halbe Zijlstra told reporters on arrival for talks with his EU peers in Brussels.
"Germany is a very influential country within the EU so if they don't have a government and therefore don't have a mandate it'll be very hard for them to take positions."
Failure to form a government in Europe’s largest economy could have implications for everything from euro zone reforms championed by French President Emmanuel Macron to the shape of relations with Britain after it leaves the EU.
Macron said on Monday he had spoken with Merkel late on Sunday when her efforts to form a coalition government collapsed and that it was not in French interests for the process to stall.
"It's not in our interests that the process freezes up," Macron told reporters in Paris.
The next government was also expected to increase spending, raising hopes of more fiscal stimulus for an economy that has been relying on consumption and state spending for growth.
The DIHK Chambers of Industry and Commerce said a prolonged period of uncertainty would be bad for the economy.
