By William Horsley BBC European affairs correspondent

Mrs Merkel has not dispelled scepticism about a recovery

But critics say the attempt to combine two opposing sets of policies may be doomed.

Germany's two big parties - Mrs Merkel's conservative Christian Democrats (CDU) and the centre-left Social Democrats (SPD) - have approved a coalition agreement setting out the policies of the next government for four years.

Mrs Merkel now looks assured of being elected chancellor in a parliamentary vote on 22 November. She claims the accord advances her party's key goals - overdue economic reforms and rebuilding the trust of the US and other countries.

But the Social Democrats seem to have got the better of the deal, in the allocation of ministries and key policies areas.

The SPD has the top jobs in eight ministries, including those of foreign affairs, finance and labour.

The CDU and its partners from the Bavarian Christian Social Union (CSU) head six ministries, including defence and economic affairs.

Their eight cabinet posts include that of the chancellor herself and one other minister in her office.

Balancing act

But the customary powers of the chancellor, to set or change the direction of government policies, will be much restricted in a "grand coalition".

Instead, the comprehensive 143-page agreement sets out what the government can and cannot do. Any serious deviation could lead to its collapse.

The two sides agreed on some important goals, including:

• Big spending cuts to bring the country's ballooning deficit within 3% - the limit set under EU rules - in 2007

• A 3% increase (to 19%) in VAT sales tax, to increase revenue and pay for a small cut in payroll taxes for employers

• Pension reforms, with extra payments and an extension of the retirement age from 65 to 67

• A simpler division of powers between central government and Germany's federal states. The centre will get more police powers against crime and terrorism; the regions get more autonomy in areas like environmental protection.

• REVERSED: Plans to cut income tax rates for high and standard earners were abandoned. Instead top earners must pay a tax surcharge of 3%

• SCRAPPED: Plans to liberalise wage bargaining, letting local plants set their own wage levels in line with their productivity, instead of setting a blanket wage level nationwide

• SCRAPPED: Plans to extend the life of German nuclear power plants

• SHELVED: Plans for more liberalisation of Germany's rigid employment laws, which experts say would help to get more people into work.

Critics say the key domestic policies agreed only bring together the worst parts of both parties' manifestoes.

In foreign policy the arguments have been more muted. But Angela Merkel has struck a markedly different tone from Chancellor Gerhard Schroeder.

Among the changes foreseen are:

• An end to anti-Americanism; the agreement says Germany will not see itself as a counterweight to the US, but as a partner

• A firmer commitment to the Nato alliance as well as the EU; the Schroeder government backed controversial plans with France, which some saw as a challenge to Nato

• A stricter line on Russian backsliding from democracy; Germany will give high priority to Russia's progress on the rule of law and a political settlement in Chechnya

• Fair and open dealings in Europe; Germany will be more mindful of the concerns of Poland and other EU states; the old Franco-German partnership will cease to be exclusive

• Turkey: Germany sees Turkey's bid for EU membership as problematic and will go on pushing for a "privileged partnership" as an alternative.

The outside world is watching to see if Mrs Merkel has the diplomatic skills to match her clarity of view in foreign affairs. She must work with a foreign minister, Frank-Walter Steinmeier, who helped Mr Schroeder to develop the mercurial foreign policy which set Germany at odds with some of its allies.

Mrs Merkel's first international steps as chancellor will be closely watched for clues. She would break the mould if she were to make her first bilateral visit, say, to Poland.

If she is duly elected on 22 November, her first major outing could be to Barcelona, Spain, to attend an EU-Mediterranean summit on 27 and 28 November. Migration from North Africa and the search for Middle East peace will be on the agenda.