BERLIN, June 1 (Reuters) - Chancellor Angela Merkel hammered out a deal with state premiers on Wednesday on the latest reform to Germany's renewable energy law aimed at curbing the costs and controlling the speed of the future roll-out of green power sources.

After a meeting with the leaders of Germany's 16 states that stretched into the early hours of Wednesday, the government agreed to limit the onshore wind power expansion at 2.8 gigawatts in capacity per year.

In addition, only a certain amount of new capacity will be permitted in north Germany to avoid overburdening the electricity grid.

"We have come a long way," Merkel told reporters following the meeting.

Generous green subsidies have led to a boom in renewable energy, such as wind and solar power. But the rapid expansion has pushed up electricity costs in Europe's biggest economy and placed a strain on its grid.

The latest reforms are aimed at slowing the growth in renewables, which accounted for around a third of Germany's electricity last year, up from 28 percent in 2014.

With the government sticking to its target for an increase in the share of renewable sources to 40-45 percent of total electricity production by 2025, it will have to put the brakes on growth to avoid overshooting.

One of the biggest sticking points in the talks were plans to limit the amount of onshore wind, with critics saying this would endanger Germany's long-term energy goals and put jobs in the sector at risk.

The government and states failed to agree on upper limits for biomass, which is important in the southern state of Bavaria. But Merkel said she expects to be able to clear up this point.

Approval by the states is essential to allow the new reforms to come into effect. The government now hopes to approve the proposals in the cabinet in coming weeks. The draft law is due to come into force at the start of 2017.

(Reporting by Markus Wacket; Writing by Caroline Copley; Editing by Leslie Adler)