Party leader Martin Schulz, Merkel's defeated challenger in Germany's Sept. 24 election, secured a party congress's agreement to a motion calling for talks on "whether and in what form" the party could support a new government.
Delegates voted down a call from party's youth wing to explicitly rule out a repeat of the "grand coalition" of Germany's biggest parties in which the Social Democrats have been junior partners since 2013.
But the road to a new government is likely to be lengthy and bumpy - a several-hour debate revealed little enthusiasm for a coalition.
Schulz had insisted after the Social Democrats' disastrous election result in September that the party would go into opposition.
He said he still wouldn't contemplate joining a new coalition after Merkel's talks with two smaller parties collapsed last month. But President Frank-Walter Steinmeier made clear he doesn't want a new election, and Schulz reversed course.
Schulz told Thursday's previously scheduled congress that the leadership's plan for talks, which he hopes to start next week, "takes no option off the table" and wouldn't automatically lead to a coalition.
"We don't have to govern at any price, but we also shouldn't want not to govern at any price," he said. "What is important is what we can implement."
Schulz has promised a ballot of the party's entire membership on any coalition deal with Merkel's Union bloc. On Thursday, leaders agreed also to hold a party congress to consider whether to move on from exploratory talks - if they are successful - to full coalition negotiations.
If no coalition is agreed upon, that would leave only a minority government or a new election as options. Merkel has said she is "very skeptical" about leading a minority government, which hasn't yet been tried in post-World War II Germany.
Schulz, however, made clear that some form of support for a minority conservative government is very much an option for his party.
"I give you this promise: we will explore every path," he told delegates.
In his speech, Schulz listed center-left priorities such as equal treatment for men and women in the labor market and a relatively liberal approach to immigration, rejecting the idea of a cap on the number of refugees allowed into the country.
The former European Parliament president called for a eurozone budget to boost investment and growth in Europe, and a European finance minister who would curb "tax dumping."
He also advocated aiming for a federal "United States of Europe" by 2025, and argued that countries that don't sign up to a treaty establishing a federal setup should then automatically leave the European Union.
Merkel gave a skeptical response when asked at a separate event in Berlin about Schulz' push for a federalized Europe. She said she would concentrate on securing greater cooperation on economic, security, defense and other issues by 2025.
The Social Democrats have been part of Germany's government for 15 of the past 19 years - twice joining a "grand coalition" under Merkel, from 2005 to 2009 and again from 2013 until now.
But the party suffered historically poor election results after both Merkel coalitions, with support slumping to a post-war low of 20.5 percent in September.
"The renewal of the Social Democratic Party will happen outside a 'grand coalition,' or it won't happen," said the leader of its youth wing, Kevin Kuehnert.
Delegates later re-elected Schulz as party leader. Schulz, who ran unopposed, won some 82 percent support - short of the unanimous backing he received when first elected in March.
"I hope that, on the basis of this result, better times will come," he said.
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