Chancellor Angela Merkel said on Monday that Europe must move step-by-step toward political union, calling the euro zone debt crisis the continent's toughest hour since World War Two.

In a one-hour address to thousands of delegates from her Christian Democrats (CDU), Merkel offered no new ideas for resolving the crisis that has forced bailouts of Greece, Ireland and Portugal, and has stirred worries about the survival of the 17-state currency zone.

But she made clear that Germany will have to make more sacrifices.

The challenge of our generation is to finish what we started in Europe, and that is to bring about, step by step, a political union, Merkel told the party congress in the east German city of Leipzig.

Europe is in one of its toughest, perhaps the toughest hour since World War Two, she said.

The two-day party meeting was supposed to focus on education policy but was dominated from the outset by the euro zone's debt crisis, which showed no signs of abating despite the naming of new technocrat governments in Greece and Italy.

Merkel, who came to power in 2005, does not face an election until 2013, but knows she could easily become another victim of euro turmoil unless she plays her cards right.

The CDU is the party of Helmut Kohl, who led Germany into the euro.

Nearly 13 years on, many German conservatives are uneasy with taxpayer-funded bailouts of weak euro states, deeply resent fiscal backsliding in countries such as Greece and worry the crisis may compromise the independence of the European Central Bank. Some in the party believe the whole project was a mistake which must now be undone.

But Merkel argued that Germany had a responsibility toward its partners and was vulnerable itself if other euro zone states were dragged into the crisis, reminding the party that 60 percent of German exports go to the European Union .

Irish problems are Slovak problems, Greek problems are Dutch problems, and Spanish problems are our problem, Merkel said. Our responsibility does not end at our borders.

At the same time she made clear there are red lines Germany was not prepared to cross, rejecting joint euro zone bonds and other quick fixes which Germany believes would discourage euro states from running responsible fiscal policies.

TOUGH ROAD AHEAD

The hard part is that this crisis was not created overnight, it is the result of decades of mistakes, and we can't solve it in one fell swoop. We have a long, tough road ahead of us, she said.

Merkel was walking a fine line at the party congress in Leipzig which ran under the banner For Europe - For Germany.

The main resolution from the CDU leadership sent two seemingly contradictory messages: that Germany has benefitted hugely from the euro, must gird for more burdens to save it and be ready to give up sovereignty to Brussels, and that member states that violate European fiscal rules must be dealt with harshly, and may even leave the bloc.

It is not only her euro policy which has sparked dissension in CDU ranks. After the Fukushima disaster in Japan earlier this year, Merkel abruptly abandoned the party's long-standing support for nuclear power, enraging the CDU's business wing.

Last month she made another surprising about-face, backing the introduction of a nationwide minimum wage, a policy she had publicly opposed for years.

Both reversals are part of a deliberate strategy by Merkel to co-opt the positions of rival parties, as she did on environmental and family policy in her first term, and increase her coalition options for 2013, when partnerships with the Social Democrats (SPD) or Greens may be her only hope of retaining power.

Since becoming chancellor six years ago, she has overseen a dramatic transformation of the CDU that has made it nearly unrecognizable from the free-market, business-friendly party that gathered in the same city of Leipzig back in 2003.

Back then Merkel was often likened to Britain's hard-charging reformist Prime Minister Margaret Thatcher, a comparison no one makes anymore after her sharp turn left.

But if the euro zone crisis blows up before the next German vote, forcing one or more countries out of the bloc and hammering the region's economy, then even the most canny political maneuvers and reinventions probably will not save her.

(Writing by Noah Barkin and Stephen Brown)

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