BERLIN, Feb 28 (Reuters) - German election winner

Friedrich Merz's conservatives and outgoing Chancellor Olaf

Scholz's Social Democrats (SPD) held "open and constructive"

talks towards forming a coalition, a joint statement said on

Friday without giving details.

Parliamentary arithmetic means the centre-left SPD is the

most likely ally to help Merz's conservatives form a new

governing majority, but there is ill-feeling between the parties

after a bruising election campaign.

Investors are watching what price the SPD will demand to

join a government and whether parties will agree to a massive

new defence fund and reforms to borrowing limits known as the

"debt brake", either in the outgoing parliament or the next.

Economists and investors want a rapid easing of the debt

brake to lift Europe's largest economy out of the doldrums and

fund an overhaul of Germany's military, which has taken on

urgency with Donald Trump back in the White House and dealing

with Russia over the heads of Europe on ending the Ukraine war.

"The exploratory talks began in an open and constructive

atmosphere," said a statement after several hours of talks at

which the outgoing finance minister, Joerg Kukies, also gave an

overview of the state's finances.

Discussions will continue next week.

The CEO of German chemicals group BASF, which is

undergoing a massive restructuring programme to cut costs as

Germany's economic falters, joined those calling for a quick

agreement. Markus Kamieth told a press conference after the

release of financial results that the two parties "need to get

their act together" and focus negotiations on a limited number

of the most important topics.

Critics - even some within his own party - worry that Merz's

abrasive style could complicate the formation of a viable

coalition and leave a vacuum at the heart of one of Europe's

major powers at a critical juncture.

Some incoming SPD lawmakers openly oppose a government with

Merz at the helm, the Bild newspaper reported on Friday.

The radical Left party performed strongly in Sunday's

election and, together with the far-right Alternative for

Germany (AfD), could block some legislation in the new

parliament.

On Friday it threatened legal action at the Constitutional

Court if parties tried to pass a new special defence fund worth

hundreds of billions of euros in the outgoing parliament, as

some lawmakers have called for.

A separate Constitutional Court ruling in 2023 about unspent

pandemic funds blew a hole in the government's budget.