Chancellor Gerhard Schroeder has offered to discuss simplifying Germany's notoriously complicated tax system with the opposition, whose control of the Bundesrat upper house of parliament means their assent is needed to pass any changes.
"I unfortunately do not have the impression that Chancellor Schroeder has the strength or creativity to implement a really radical tax reform," she told the Sunday Frankfurter Allgemeine Sonntagszeitung. "So in all probability, there will be no major tax reform this year," she said.
Failure to agree a deal on tax this year would risk delaying further reforms until after the next federal election in 2006 as conservative leaders have said they would prefer to wait to form a government themselves if no agreement is reached soon.
Merkel's comments come as her Christian Democrats (CDU) have struggled to agree a line on tax reform with their sister party the Christian Social Union (CSU), which has criticised radical reform plans from CDU finance spokesman Friedrich Merz.
Finance Minister Hans Eichel accused Merkel of trying to divert attention from her own party's problems but said the government was still prepared to talk to the opposition.
"If the Union manages to come up with a clear concept for tax reform which shows a clear willingness to cut subsidies through a draft law for the Bundesrat which can be financed, then we are ready to talk," he said in a statement.
Schroeder succeeded last year in bringing forward part of a package of tax reforms that were due to come into force in 2005 but accused the opposition of blocking cuts to subsidies and tax breaks for groups including commuters and homeowners.
Despite broad agreement about the need to reform a tax system which is so complicated that few Germans risk filling out their tax returns without the aid of a tax consultant, attempts to produce a simpler system have been dogged by disagreement.
Merz has proposed a radically simplified tax system based on three basic income tax bands that cut lower taxes sharply and eliminate most tax breaks. But critics in both the government and the CSU have attacked the proposals for leaving a 24 billion euro hole in Germany's already strained public finances.
Last week, CDU leaders appeared to distance themselves from the more radical elements of the Merz proposals, saying the main aim of a tax reform should be creating a simpler and more understandable system rather than cutting tax levels.