Delegates from Ms Merkel's conservative Christian Democratic Party (CDU) and the centre-left Social Democrats (SPD) voted in favour of both parties forming a government to be sworn in next week. The move ends weeks of uncertainty about Germany's political future.
Ms Merkel, 51, quoted a former Chancellor Konrad Adenauer, when she admitted that her future coalition was "not the art of the desirable, but the art of the possible". Speaking at a special conservative party rally in Berlin, she added: "Germany has not had a government capable of action for months and its people are waiting for a solution. It is our job to follow the wishes of the voters."
Earlier, Christoph Bö, the conservatives' deputy leader, urged delegates to vote in favour of a grand coalition. "If this arrangement collapses today, the only alternative will be fresh elections," he warned. In the western city of Karlsruhe, Social Democrat delegates also gave their approval to the grand coalition project by 503 votes to 15. Franz Müntefering, the prospective SPD vice-chancellor, appealed to the party's rank and file to vote for a government that aimed to " be of use to the people". He added: "Grand coalitions are not easy. But it is better to be in government than to be without influence in opposition. Let us give it a try."
The parties' joint approval for the coalition was the climax of weeks of fraught political negotiations aimed at forming a new government which followed the country's inconclusive general election on 18 September.
Ms Merkel, whose party failed to win a big enough majority to govern with its preferred partners, was finally obliged to enter into an alliance with the SPD. But the coalition deal reached by the two parties last week has been dubbed a "forced marriage" and has drawn fierce criticism from politicians of all parties, economists, business leaders and trade unions.
Several commentators predicted Ms Merkel's future government would not last more than two years because of the inherent strains imposed on an alliance made up of parties normally opposed to each other. Germany was last ruled by a grand coalition in the 1960s.
Ms Merkel plans to increase VAT from 16 to 19 per cent, cut pension subsidies and impose a special "rich tax" in an effort to reduce the country's €35bn (£23.5bn) budget deficit. On foreign policy, she aims to improve Germany's hitherto battered relations with the United States and will oppose Turkey's membership of the European Union.
Her domestic proposals have earned the wrath of businessmen in particular because of their apparent failure to address Germany's pressing economic problems and tackle its record unemployment.
Several leading conservatives have also attacked the coalition deal, claiming that it bears the handwriting of the SPD and fails to adequately reflect conservative policy.
Ms Merkel hit back at her critics, saying: "We have to show people that there is light at the end of the tunnel." Other conservatives accused those who had attacked the coalition deal as "individuals who appear not to realise the gravity of Germany's predicament".
Delegates at the SPD conference were also treated to an emotional valedictory speech for Gerhard Schröder, who will leave office on 22 November. Mr Müntefering praised Mr Schröder for proving himself "worthy of Germany and the SPD" during his seven years in office.
"We will remember you for having the courage to embark on reforms and for turning Germany into a peaceful and self-confident power," he added.Reuse content