A German centre-right government under Chancellor Angela Merkel would look to sell some company holdings held by the state, documents seen by Reuters showed on Wednesday as leaders gathered for coalition negotiations.

Party leaders, including Merkel and Guido Westerwelle, head of the pro-business Free Democrats (FDP), are taking part in the talks which will try to thrash out a policy agenda for the next four years and divide up cabinet posts.

The parties are expected to usher in policies that will include some form of tax relief, a rolling back of the state and an extension of the lives of some nuclear plants.

A paper drawn up by the working group on economic policy said the new coalition would look at Germany's holdings.

The state's stakes in industrial companies and financial institutions should be limited to as short a period as possible, said the paper.

If approved by Merkel, who heads the conservative Christian Democrats (CDU), and the leaders of its Bavarian sister party, the Christian Social Union (CSU), and the FDP, the plans could lead to a number of sales.

Over the last year, the government has invested in banks, such as Commerzbank (CBKG.DE) and Hypo Real Estate (HRXG.DE) to help them weather the financial crisis.

Another candidate for privatisation is rail operator Deutsche Bahn [DBN.UL], whose listing was shelved last year due to adverse markets. The government also holds roughly one third of Deutsche Telekom (DTEGn.DE) and Deutsche Post (DPWGn.DE).

THORNY ISSUES

Heading into the meetings -- expected to last most of the day -- top party members said the talks were making progress. But there are still thorny issues, including tax cuts and tackling the budget deficit.

It is going well, we will take as long as we need for a really good result, Westerwelle told reporters.

Working groups have been drawing up proposals to put to a wider meeting, including leaders, and the parties will meet again in coming days. Merkel wants the new government in place by Nov. 9, when Germany celebrates the 20th anniversary of the fall of the Berlin Wall.

Some in the FDP said they expected results later in the day.

I'm sure we will achieve some initial good results, FDP General Secretary Dirk Niebel said.

Tax remains one of the most difficult areas.

The FDP campaigned on cuts of up to 35 billion euros but have since acknowledged the weak state of public finances may make that difficult. This could be a signal that tax relief will end up closer to the conservative pledge of 15 billion euros.

Goldman Sachs said the FDP seemed to be concerned that little of its election platform would be in the final deal.

The chances for a significant reduction in the tax burden for households by Jan. 2010 are slim, economist Dirk Schumacher said in a research note, adding the FDP may save face by agreeing on a general overhaul of the tax system.

Germany