* Social Democrats agree to exploratory talks for coalition with Merkel
* But German centre-left wants all party members to endorse any deal
* Party vote could complicate, delay creation of new government
Germany's opposition Social Democrats decided on Friday to put any decision to join a 'grand coalition' with Angela Merkel to a vote of its 472,000 grassroots members, an unwieldy process that could complicate the creation of a new government.
But an extraordinary meeting on Friday of 200 party leaders also gave embattled chairman Sigmar Gabriel a green light to begin exploratory talks with Chancellor Merkel's victorious conservatives to see if there is scope for full-fledged talks.
Merkel's Christian Democrats emerged as the dominant party from Sunday's election but her party fell short of a majority, winning 311 seats in the 630-seat parliament while the SPD took 192. The Greens got 63 seats and the radical Left party have 64.
Merkel's conservatives need a new coalition partner and would prefer a 'grand coalition' with the SPD, a reprisal of the right-centre alliance she led from 2005 to 2009. But SPD leaders and party members are reluctant, fearing a loss of identity.
"The SPD decided that we'll be available for exploratory talks with Frau Merkel," said Gabriel, 54, at the end of the four-hour meeting after dozens of SPD activists protested loudly against a grand coalition outside party headquarters.
"But the party did not open the door for full-scale talks," he said. "If Frau Merkel invites us to exploratory talks we'll take the findings from that meeting back to the party leaders before deciding if we're open for full negotiations."
Ordinarily a party chairman or small group of party leaders makes decisions to enter talks but Gabriel, under pressure in Germany's oldest party for another election drubbing, is being cautious and seeking party endorsements for all key decisions.
Exploratory talks with Merkel and her conservatives could start on Monday or next week. Based on past experience full-fledged talks would take up to two months.
According to the decision on Friday, all 472,000 SPD members would be given the chance to vote on any decision to form a grand coalition in mid-November, before an annual SPD party congress in Leipzig set for November 14-16.
"Gabriel will be severely damaged if he doesn't get this through," one SPD executive board member told Reuters.
Olaf Scholz, a powerful SPD board member and Hamburg mayor, said that the SPD wasn't afraid of the talks failing and of possible new elections. He said the ball was in Merkel's court.
"If you don't have a majority, you need to get a majority and she doesn't have a majority," he said.
SPD MEMBERS REJECT MERKEL
An opinion poll on Friday showed two-thirds of the party's members oppose a 'grand coalition' with Merkel because they fear the party could wither further in the shadow of the popular chancellor.
The right-left coalition would nevertheless be the most popular constellation in Germany, the poll also found. More than half of Germans said they would welcome a 'grand coalition'.
Many in the SPD oppose a grand coalition because their support crumbled after the 2005-09 right-left alliance to their worst post-war result of 23 percent. They recovered to 25.7 percent on Sunday but it is below the 40.9 percent won in 1998.
The fate of Merkel's allies in her last coalition, the Free Democrats, also frightens many in the SPD. The FDP plunged from a record 14.6 percent in 2009 to 4.8 percent on Sunday, failing to even win seats in parliament for first time since 1949.
Many in the SPD don't want to get run into the ground as unappreciated and unrewarded partners. They also worry the radical Left party would poach left-leaning voters from the SPD.
A key issue dividing Merkel's conservatives and the SPD is taxes. The SPD wants to raise tax rates on incomes above 100,000 euros to 49 from 42 percent and introduce a nationwide mininum wage while the conservatives are firmly opposed to both.
On Europe, the SPD would seek symbolic steps to promote growth in struggling euro zone states but is not expected to push hard for debt mutualisation, despite having backed the idea of a debt redemption fund during its campaign.