German Chancellor Angela Merkel's attempt to form a coalition government with her rivals appeared to collapse late Sunday, putting the political fate of Europe's largest economy in the hands of its most senior politician.

Merkel is likely to tell President Frank-Walter Steinmeier Monday that she is unable to form a government after four weeks of talks with the environmentally-focused Green party and pro-business Free Democratic party after the later abruptly abandoned talks Sunday and described Merkel's negotiating stance as being riddled with "countless contradictions."

Merkel's fourth-term as Chancellor is now is jeopardy, as is indeed the fate of parliament in Europe's biggest economy, as she will either have to form a minority government with the Greens or ask the President to call fresh elections in the new year - both of which haven't happened since the Second World War.

"It is a day of deep reflection on how to go forward in Germany," Merkel lamented to the German media even as she indicated she would stay on as Chancellor. "I will do everything to ensure that this country is well managed in the difficult weeks to come."

The euro fell to a two-month low of 1.1753 in overnight Asia trading following the collapse of the talks, which had pitted Merkel's Christian Democrats against the Free Democrats, one of the surprise gainers in September's national elections that also so troubling increases in support for far-right and neo-nazi parties.

The lack of government clarity in Berlin, which generally drives decision-making in the broader European Union, comes at an exceedingly sensitive time for the bloc, which is not only negotiating exit terms for the United Kingdom but is also  bracing for national elections in Italy, its third-largest economy, that could see significant gains for the anti-European 'Five Star Movement' party and its firebrand leader, Beppe Grillo.

It could also delay, or possibly derail, the reform agenda championed by new French President Emmanuel Macron, just as the region's economic recovery is kicking in to full swing.

New estimates from the European Commission suggest the economy is set to grow at its fastest pace in a decade, with collective GDP growth for the 19 countries that use the single currency expanding at a 2.2% clip this year -- well ahead of its Spring estimate of 1.7% -- and 2.1% in 2018. The region's executive branch also said it expects to see France and Spain to cut budgets deficits deeply enough to align with EU rules and sees Italy's debt-to-GDP ratio peaking at 132.1% this year.

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