* Conservatives, SPD make breakthrough after month of talks

* Merkel could form her third government by Christmas

* SPD must first get okay from 474,000 party members

By Stephen Brown and Erik Kirschbaum

BERLIN, Nov 27 (Reuters) - German Chancellor Angela Merkel's conservatives and the centre-left Social Democrats (SPD) reached a deal early on Wednesday on forming a "grand coalition" after wrangling through the night, meaning she should be able to form a government by Christmas.

Two months after Merkel's landslide election victory and a month after negotiations began, Germany's two biggest political forces clinched a deal at about 5 a.m. (0400 GMT) that both sides said they could live with.

"The result is good for our country and has a conservative imprint," said Hermann Groehe, secretary general of Merkel's Christian Democrats (CDU). "No new taxes and no new debts."

Martin Schulz, president of the European Parliament and a senior SPD negotiator, called it an "excellent result" for his party, whose participation in a Merkel government still depends, however, on a ballot among 474,000 card-carrying SPD members.

That adds uncertainty to a process that has dragged on for months, preventing Germany's European partners from pushing ahead with major reforms like a banking union. But the likely outcome remains continuity under the popular chancellor.

Party leaders should present details of the deal at a news conference on Wednesday but may wait to announce the allocation of cabinet posts. Merkel left the SPD headquarters, where the final round of talks took place, without a word to the media.

But details of policy compromises emerging in recent days show she has leveraged her landslide victory in September's vote to ensure her pragmatic brand of conservativism continues to dominate Europe's largest economy.

Her CDU and their Bavaria sister party, the Christian Social Union (CSU) thrashed the SPD but failed to win a parliamentary majority, forcing Merkel to seek a partner.

She has made concessions to the SPD on the economy, agreeing to a minimum wage of 8.50 per hour, tighter rules for employers and pension hikes, despite howls of protest from business. Just before dawn, the bargaining stalled on how to fund this without Merkel breaking a campaign promise not increase taxes or debt.

Polls suggest most people trust 59-year-old Merkel not to endanger an employment rate which is the envy of Europe. She is also trusted on the euro crisis, where she has demanded fiscal reforms from the likes of Greece in return for bailouts.

Carsten Nickel, a political analyst at Teneo Intelligence, said the SPD had realised, after flirting with the idea of common euro-zone bonds, "that the domestic political consensus does not reward any large-scale deviation form Merkel's path".