Gerhard Schröder and Angela Merkel began attempts to cajole their political opponents into a power-sharing coalition today after both main parties claimed victory in Germany's inconclusive general election.

Frau Merkel's conservative Christian Democrat Union (CDU) squandered a predicted 20-point lead to scrape victory in the polls, winning just three more seats than incumbent Gerhard Schröder's Social Democrat Party (SPD) last night.

The margin of victory, however, is less than 1 per cent - and so narrow that it has left both parties claiming triumph and both leaders battling to become Chancellor.

In truth, neither has the majority required for their preferred coalitions and both need to woo the support of a third party by the time Parliament reconvenes on October 18.

The resulting uncertainty and fears of a political paralysis caused the euro to slip to a seven-week low against the dollar when markets opened in Frankfurt this morning.

Analysts predict further, long-term damage from the electoral death-blow dealt by the electorate to the CDU's proposed reforms on labour and tax rules.

The stalemate was greeted with surprise and dismay across Europe - except in Ankara, where it is believed that the result will dampen Frau Merkel's long-standing opposition to Turkey's admission to the EU.

Many commentators predict that the most expedient solution is a 'grand coalition' between the two main parties, who would form an emergency partnership to tackle Germany's 11.4 per cent employment and resuscitate its stalling economy before going back to the country within four years.

The personal ambition and vanity of their two leaders, however, and their wildly opposing views on fundamental measures to complete an economic turnaround mean that this is considered as a last option by the parties.

Herr Schröder regards himself as the popular choice and the 'People's Chancellor', despite the ballot box arithmetic, and has stated categorically that he would not play second fiddle to a Chancellor Merkel.

Frau Merkel, once hailed as Germany’s Margaret Thatcher, is meanwhile still emphasizing her claim to become chancellor: "We have the strongest group in parliament and, with that, a clear mandate to form the government," she said.

Neither elaborated on their strategy but both have ruled out negotiating with the radical post-communist Left Party.

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