UPDATE 2-Merkel ready for "painful compromises" with coalition deal in sight

* Merkel says Germany needs a stable government

* SPD leader Schulz says before talks: "It's decision day"

* Negotiators aim to clinch deal on Tuesday

* Poll shows most voters no longer support 'grand coalition' (Adds detail on talks, court rejecting complaints on SPD vote)

BERLIN, Feb 6 (Reuters) - German Chancellor Angela Merkel said she was ready to make "painful compromises" to clinch a coalition deal with the Social Democrats (SPD), whose leader said Tuesday was "decision day" for negotiators after months of political uncertainty.

Both blocs agreed late on Monday they needed more time to reach a deal on renewing their "grand coalition" and decided to resume talks at the headquarters of Merkel's party on Tuesday.

"Each of us will have to make painful compromises and I am ready for that," Merkel told reporters.

"When we see the movements on the stock markets over the last hours, we live in turbulent times and what is expected of us as popular parties ... is that we form a government for the good of the people, one that brings stability," she said.

Merkel's failure to cobble together a government more than four months after a national election has raised concerns among investors and partner countries at a time when Europe is facing multiple challenges - including the need for euro zone reform and Britain's departure from the EU.

Germany could face a new election or an unprecedented minority government if SPD members reject a coalition deal. But negotiators from both blocs said they must reach agreement on Tuesday.

Andreas Scheuer, secretary-general of Merkel's Bavarian allies, said there was no possibility of extending the talks beyond Tuesday: "So we have to come to an agreement tonight. Anything else would be unreasonable for our citizens."

Senior negotiators from both blocs met on Tuesday morning. A larger group of conservative negotiators was on standby for a potential briefing on possible developments from 4 p.m. (1500 GMT), participants in the talks said.

Germany has been governed by a caretaker government since the Sept. 24 election returned no clear outcome.


After initially vowing to rebuild in opposition, the SPD is now trying to extract concessions on healthcare and employment policy that could win over sceptics among its 443,000 members, who get the final say on whether to go ahead with the coalition.

The Rheinische Post newspaper said Germany's Constitutional Court was examining five complaints about the legitimacy of the SPD members' ballot. A spokesman for the court said two of the five complaints had been rejected.

In 2013, the court rejected an injunction seeking to stop a similar ballot on the grounds that it was unconstitutional to give SPD members more say than other voters.

SPD politician Ulrich Kelber believed all the complaints would fail this time too: "Forecast: fiddlesticks!" he tweeted.

The SPD campaigned last year for "a better and fairer Europe". Its leader Martin Schulz on Monday lauded an agreement his party and the conservatives reached that he said included "an investment budget for the euro zone and an end of forced austerity!"

But Schulz made no specific mention of any plans to advocate for more powers and responsibilities for the European Stability Mechanism euro zone bailout fund, as was envisaged in a coalition blueprint agreed on Jan. 12.

Some conservatives fear that rushing ahead with European integration would be too costly to German taxpayers - concerns fuelled by former European Central Bank chief economist Otmar Issing, who described the January coalition blueprint as "a farewell to the idea of an EU aimed at stability".

Both Merkel's conservative bloc and the SPD are under pressure not to concede too much in the negotiations, or else see their support ebb further.

An Insa poll on Monday showed mounting pressure on Schulz, with support for the SPD dropping to just 17 percent, below its election result of 20.5 percent, which was the party's worst since Germany became a federal republic in 1949.

That left the SPD just two percentage points ahead of the far-right Alternative for Germany (AfD), on 15 percent. The conservatives slipped to 30.5 percent, suggesting there would be no majority for a grand coalition if an election were held now.

SPD negotiator Carsten Schneider said a deal was close.

"I think we have 90-95 percent, but the remaining five percent is still important," he said. "It's not going to be a masterpiece but it will do for the next 3-1/2 years." (Additional reporting by Hans-Edzard Busemann; Writing by Paul Carrel; Editing by Janet Lawrence and Gareth Jones)