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BERLIN -- German Chancellor Angela Merkel and her Christian Democratic Party agreed to form a new government with the upstart conservative Free Democrats on Saturday, setting the stage for major changes in both German domestic and foreign policies.

The CDU and the FDP, which is led by Guido Westerwelle, have been locked in tough negotiations over both cabinet appointments and policy platforms for weeks. Westerwelle, who is expected to be named foreign minister, was pushing for tax cuts of $52 billion, while Merkel was advocating much more modest cuts.