* Tripartite talks collapsed with Free Democrats and Greens
* SDP offers Merkel a coalition lifeline
* GRAPH: Political crisis in Germany – tmsnrt.rs/2AjqF5m (Add economists, links to graphs and boxes)
By Madeline Chambers
BERLIN (Reuters) – The leader of the Conservatives of Bavaria supported on Sunday his alliance with the Social Democrats of Germany (SPD), which was added to the impulse of a new "grand coalition" to break the political deadlock in Europe's largest economy.
Conservative Chancellor Angela Merkel, whose fourth term was mired in doubt a week ago when the tripartite coalition talks with the Liberal Democrats (FDP) and Greens collapsed, received the SPD's political lifeline on Friday.
Under intense pressure to preserve stability and avoid new elections, the SPD reversed its position and agreed to speak with Merkel, raising the prospect of a new grand coalition, which has governed for the past four years, or a minority government.
"An alliance of the conservatives and the SPD is the best option for Germany, better than a coalition with the Free Democrats and Greens, new elections or a minority government", Horst Seehofer, head of the CSU of Bavaria, sister party of Merkel conservatives, they told Bild am Sonntag.
Several European leaders have emphasized the importance of establishing a stable German government quickly so that the bloc can discuss its future, including the proposals of French President Emmanuel Macron on reforms in the euro zone and Brexit.
Merkel says that an interim government under her leadership can do business until a new coalition is formed.
She said on Saturday that she would seek a grand coalition. An Emnid poll showed on Sunday that 52 percent of Germans backed a grand coalition.
The youth wing of the Merkel conservatives pressured the parties to reach an agreement before Christmas.
"If there is no coalition agreement between the conservatives and the SPD by then, the negotiations will be seen as a failure," Junge Union said in Bild am Sonntag.
The head of the group told the newspaper that conservatives should persecute a minority government if they fail to reach an agreement with the SPD.
Merkel is against following that route due to its inherent instability, but experts have said that Conservatives and Greens could form a minority government with informal support from the SPD. The Greens have said they are open to a minority government.
Even before the talks begin, the two blocs have begun to delineate their political priorities.
Merkel, whose conservatives won the majority of parliamentary seats in a vote on September 24 but bled support for the far right, has said she wants to maintain sound finances in Germany, cut some taxes and invest in digital infrastructure.
You have to keep the Bavaria CSU on board by following a stricter migrant policy that can also help recover the conservatives who switched to the Far Right Alternative for Germany (AfD).
The SPD, meanwhile, needs a platform for its policies after its poorest election since 1933. The main figures of the SPD have outlined conditions that include investment in education and households, changes in health insurance and no cap on asylum seekers.
Several prominent economists said they expect the SPD to exert significant influence on a new grand coalition.
"If there is a grand coalition or even if there is tolerance (of a minority government) I would expect more emphasis on the SPD program," Clemens Fuest, president of the Ifo Institute, told the financial newspaper Handelsblatt.
That would mean more state spending and smaller tax cuts than would have been agreed with other potential partners.
Seehofer said that the SPD should not set too many conditions. "There will not be a grand coalition at any price," he said.
Editing by Matthew Mpoke Bigg and David Goodman