Schulz had categorically ruled out another stint as junior coalition partner after four years of governing in Merkel's shadow led the Social Democrats to its worst result in decades in the September 24 election.
Mr Schulz, 61, had refused to consider continuing in coalition with Mrs Merkel after his party's poor election showing but the possibility of another "grand coalition" between Germany's two oldest parties is now revived.
Martin Schulz, leader of the Social Democrats (SPD), said his party had agreed to end its refusal to enter talks with Ms Merkel after a "dramatic" personal appeal from Frank-Walter Steinmeier, the German president.
European leaders have stressed the importance of Germany getting its political house in order ahead of the European Council summit in December.
Negotiations "should be viewed as failed" if there is no deal by Christmas and the conservatives should instead aim for an unprecedented minority government, the resolution said.
Merkel, whose conservatives won most parliamentary seats in a September 24 vote but bled support to the far right, has said she wants to maintain sound finances in Germany, cut some taxes and invest in digital infrastructure.
Merkel's conservatives have pushed to curb migrant flows and are keen to ensure that Germany sticks to a balanced budget.
Merkel's chief of staff, Peter Altmaier, told the Frankfurter Allgemeine Sonntagszeitung newspaper that her caretaker government won't take decisions that could bind its successor's hands on "major political questions". Leading SPD figures have outlined conditions including investment in education and homes, changes in health insurance and no cap on asylum seekers.
Seehofer warned the SPD however that there would not be a deal at any cost. "There shouldn't be a grand coalition at any price".