German Chancellor Angela Merkel's center-right coalition reached agreement early on Monday on contentious social welfare issues that it hopes will bolster its support in the countdown to federal elections next September.
After nearly eight hours of talks that underlined the degree of discord simmering within her three-party government, Merkel and other leaders agreed to scrap an unpopular health surcharge and to introduce extra child benefits, coalition sources said.
Merkel's junior coalition partner, the pro-business, liberal Free Democrats (FDP), is particularly desperate to impress voters after opinion polls have regularly shown it failing to clear the five percent threshold for entering parliament.
The FDP has long had to accept that tax cuts - one of its traditional causes - are not possible at a time of fiscal austerity, with Merkel leading the euro zone's efforts to overcome its three-year-old sovereign debt crisis.
The coalition, plagued by squabbles since taking power in 2009, aims to balance Germany's budget by 2014, helped by robust economic growth that has bucked the euro zone trend, although strong tax revenues are expected to tail off next year.
Instead, the FDP has pushed hard for abolition of the 10-euro-per-quarter payments for visits to the doctor, saying they have spawned red tape without reducing waiting times.
In return, the FDP reluctantly backed benefit payments for parents who keep their toddlers at home, a policy championed by the Christian Social Union (CSU), the conservative Bavarian sister party of Merkel's Christian Democrats (CDU).
Critics, including in the FDP and CDU, say this will keep women out of the workplace and children of poorer immigrants out of kindergartens where they would learn German and integrate.
The main opposition Social Democrats (SPD), who have taken a more assertive political stance since choosing former finance minister Per Steinbrueck as their candidate for chancellor next year, have vowed to challenge the child benefit plan in court.
The payments will only start from next August, shortly before the election, not as previously envisaged from January, the coalition sources said.
In their talks, billed as the last chance to launch large projects in this parliament, the coalition leaders also earmarked fresh funds for transport and agreed steps to help poorer pensioners.
Merkel's conservatives remain the most popular force in German politics with 38 percent support, an opinion poll published showed on Sunday, well ahead of the SPD's 29 percent.
But the poll, published in the Bild am Sonntag newspaper, confirmed the FDP, on just 4 percent, would fail to win seats in the new Bundestag, or lower house of parliament. The SPD's favored coalition partner, the Greens, were on 13 percent.
Such electoral arithmetic suggests Merkel might have to build a 'grand coalition' with the center-left SPD after the 2013 election, like the one she led from 2005 until 2009.
(Reporting by Thorsten Severin and Andreas Rinke; Writing by Gareth Jones; Editing by Paul Simao)