Schulz indicated on Friday that the SPD might consider coalition talks with the CDU/CSU alliance, although his party had initially ruled out this possibility. The FDP chose to withdraw the talks with the Greens, the CDU and the Bavarian Christian Social Union (CSU), for a new coalition government after the September 24 federal elections.
"I can only advise the SPD not to enter into talks with the conservatives with exaggerated demands, but to stay realistic", he told the newspaper. "There will not be a grand coalition at any price", he said.
Merkel says that an acting government under her leadership can do business until a new coalition is formed.
Talks with the SPD should be based on "mutual respect" and "compromise", she added.
She appeared to walk back that statement on Saturday, however, telling her fellow CDU members that "if we can't do anything with the (election) result, we cannot ask the people to vote again".
Seehofer said the SPD must not set too many conditions.
Leading SPD politicians however signalled they were ready to flex their muscles.
Mrs Merkel's change of mind comes as a recent poll revealed almost two-thirds of Germans would back another general election.
The Social Democrats centred their campaign on building a more socially just Germany, pledging more investment in education and infrastructure.
The CSU is the Bavarian sister party of Merkel's Christian Democrats (CDU).
German President Frank-Walter Steinmeier has invited Merkel, SPD leader Martin Schulz and CSU leader Horst Seehofer for a meeting next week to discuss another "Grand Coalition".
Germany has been left at a political stalemate for more than two months after the September 24th election failed to return a good result for Mrs Merkel.
Mr Lindner told reporters: "It is better not to govern than to govern badly".
"But it smells like it (another grand coalition)", she said.
His cautious language was echoed on Friday morning by SPD deputy leader Manuela Schwesig, who said that a new coalition government was no certainty.