After three weeks of deadlock, Angela Merkel today emerged as Germany's first woman Chancellor.

A deal has been struck sanctioning Frau Merkel to head a coalition Government, in which her Right-wing Christian Democrat party will share power with the Left-wing party of her arch-rival Gerhard Schröder .

Herr Schröder himself will not be part of the new Government. Despite a brazen show of defiance on the night of Germany's inconclusive election, he has relinquished his seven-year grip on power, ending his 40-year political career.

Herr Schröder, a man once described as Der Medienkanzler (chancellor of the media), was unwilling to play a lesser role: "This is not what I have planned for my life," he told friends.

The final weeks of Herr Schroder's premiership became personally humiliating, as party colleagues in the Social Democrats (SPD) bartered his job as Chancellor in exchange for key ministerial posts in the 'grand coalition'.

They extracted a high price. Frau Merkel's Christian Democrats (CD) have agreed to hand over several of the most important cabinet portfolios, in a deal which analysts say could fatally weaken her grip on power and make it impossible for her to push through her policies.

The conclusion of the weeks of uncertainty in Europe's biggest economy was received with optimism on the money markets, and the euro immediately rose against the dollar.

Frau Merkel's appointment was made public this morning after a night of tough negotiation between the two rivals. Giving her first news conference, she said today: "We have unanimously agreed that we will start coalition negotiations with the SPD aimed at creating a grand coalition."

She described the deal as "good and fair", and remained confident that her programme of reforms aimed at re-invigorating the nation's stalled employment market would survive, adding: "We want to work together for the people of this country."

Of the 16 Cabinet portfolios, the SPD has taken the powerful finance, foreign affairs, employment, health, justice, labour, environment and transport posts. Frau Merkel has retained the ministry of the interior, defence, home security and the new economy and technology brief. The talks to formalise the new government are expected to be completed on November 12.

Peter Struck, currently at the defence ministry, has replaced the Green Party's Joschka Fischer as Foreign Minister, a post which usually also carries the position of Vice Chancellor.

There has been feverish speculation of Herr Schröder's next move. Pundits suggest that the man who learned law at night school while working as a sales clerk will now either join the board of a US bank, or take the helm of one of the newly-renationalised Russian companies run by his close friend President Putin. He will certainly have more time to spend with his fourth wife and their adopted Russian daughter, Viktoria.

The SDP and CD were forced into an alliance after neither was able to form a coalition among minority parties following the ballot on September 18 which gave the Christian Democrats just three more seats that their rivals.

After weeks of failed talks, it was the result of a late election in Dresden, in which Frau Merkel's party won a psychologically decisive victory and an extra seat giving them 226 against 222 in the 614-seat parliament, which appears to have forced Herr Schröder's hand.

Once the key posts have been appointed, the horse-trading will begin between the two partners to form policies to lift Germany out of its economic stagnation. The country is lagging in the economic doldrums with unemployment stuck stubbornly at just below 11 per cent.

Frau Merkel was elected on a rightist reform agenda, but it is unclear how far she will now be able to push that reform agenda without upsetting the SPD's pledge to protect workers' rights, social justice and the welfare state.

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