UPDATE 2-German union backs SPD bid to start formal coalition talks

* Merkel hopes for coalition with SPD for fourth term

* SPD delegates vote on Sunday on coalition talks

* CSU leader warns of disaster if they reject talks (Recasts with union recommendation for coalition talks)

BERLIN, Jan 18 (Reuters) - Germany's largest union grouping on Thursday recommended the centre-left Social Democrats (SPD) vote to start formal coalition talks with Chancellor Angela Merkel's conservatives, bolstering an all-out drive by the party to rally support.

The DGB Confederation of German Trade Unions, which represents some 6 million workers, said a blueprint agreed by the two political blocs would result in advances for workers.

The SPD is racing to overcome resistance to another "grand coalition" among rank-and-file members ahead of a party congress on Sunday, even as leading conservatives warned that failure to endorse coalition talks would result in political chaos.

Nearly four months after the election, Merkel has still not managed to form a government.

The uncertainty has eroded her public standing after 12 years as the dominant leader of Europe, and she is now counting on the SPD, her coalition partner from 2013 to 2017, to once again agree to a tie-up.

Many in the party are reluctant, arguing that the party needs to reinvent itself in opposition after posting its worst election result in September since 1933.

However, DGB chief Reiner Hoffmann said all eight of the trade unions in the association backed further coalition talks.

"We have reviewed the results of the exploratory talks and there is much substance there for workers in Germany," he said.

Six hundred delegates will vote on Sunday on whether to embark on full-blown coalition talks. All SPD party members will vote by mail on a final coalition deal, if there is one.

Merkel's top Bavarian ally, Horst Seehofer, on Thursday said an SPD vote against coalition talks would be "a political disaster for our country", leading to a new election that would likely be followed by even more arduous coalition negotiations.

"I can only appeal to everybody to get their act together and enable the formation of a government. Anything else would be disastrous for Germany."


The SPD's parliamentary leader, Andrea Nahles, said about a third of delegates were still undecided, but she was optimistic a majority would vote to endorse the talks.

Nahles told the Funke Mediengruppe newspaper chain the blueprint agreed with conservatives contained good measures, including plans to boost pensions, phase out a solidarity tax imposed to help poorer eastern states, and avert an upper limit on migration.

While she conceded the SPD had not won all its demands in the negotiations, including a call for a universal health insurance, she said other important projects were within reach.

"We stand before a difficult fork in the road: Do we want to turn this (agreement) into new policies for the people of our country, or do we want new elections?" she asked.

The SPD's youth and left wings oppose coalition talks and say the blueprint does not contain enough SPD hallmarks.

A Forsa poll published on Thursday showed the SPD slipping to 18 percent, below the 20.5 percent it achieved in September's election. Support for Merkel's CDU/CSU bloc rose to 34 percent, slightly above its election result of 32.9 percent.

Manuela Schwesig, deputy head of the SPD, urged delegates to vote for coalition talks and avoid splitting the party.

SPD leader Martin Schulz and Michael Groschek, the party leader in the western state of North Rhine-Westphalia (NRW), which accounts for about a quarter of the delegates to Sunday's vote, on Wednesday both forecast a positive outcome.

Schulz, seeking to assuage critics' concerns, told reporters that some areas such as healthcare and rental caps could be added during formal coalition talks, and highlighted the fact that negotiators had agreed to review the deal after two years.

Refusal by SPD delegates to hold further talks could lead to new elections or a minority government for the first time in Germany's post-war era.

(Additional reporting by Andrea Shalal and Tom Koerkemeier; Editing by Alison Williams)