Such a move by the pro-business Free Democrats, languishing at historic lows in popularity polls, would break up Merkel's government at a decisive moment in Germany's efforts to resolve the euro zone debt crisis.

"I don't know of any relevant voices that are of the opinion the FDP should seek salvation with the opposition," deputy leader Martin Lindner told Reuters.

Another source in the party leadership backed up Lindner's comments, and Health Minister Daniel Bahr, a regional FDP leader, called the report "baloney."

Business weekly Wirtschaftswoche had reported that the FDP leadership was evaluating arguments in favor of ending the coalition and seeking a rationale that would prove popular among Germans.

The party, which has been in the doldrums for almost two years after scoring 14.6 percent in the 2009 election, has been polling below the 5 percent threshold needed to enter parliament since September.

A conference earlier this month fell flat in its attempts to revive the party, beset by infighting, divisions over policy and a membership disappointed at its failure to deliver promised tax cuts.

A weak FDP, Merkel's desired coalition partner in 2009, is bad for the chancellor as it makes for a more difficult ally, keen to score points and show it can wield influence. If Merkel is re-elected in 2013 she may have to find another partner.

Some analysts say the party could be threatened with extinction unless it turns its fortunes around fast.

(Reporting by Thorsten Severin, writing by Brian Rohan)