BERLIN (Reuters) - Chancellor Angela Merkel s efforts to forge a three-way ruling coalition dragged into the wee hours of Friday, with some participants warning that differences on climate, migration and finances could still cause the talks to collapse. The conservative leader had set Thursday as a deadline for exploratory talks about forming a coalition with the pro-business Free Democrats (FDP) and the environmentalist Greens - a combination untested at the national level that would allow her to govern for a fourth term as German chancellor. Merkel, 63, had told reporters on Thursday that serious differences remained and the talks could take many hours. Participants girded for a marathon session, or what German media have called the  night of the long knives.  The mood soured noticeably late on Thursday, with parties breaking off to huddle in their respective caucuses before senior negotiators resumed tough discussions on migration. Senior FDP official Alexander Lambsdorff described  serious faces  in a post on Twitter, while FDP deputy leader Wolfgang Kubicki suggested an extension of the talks might be needed. Conservative participants conceded the talks were not going well. The Greens and the Bavarian wing of the conservatives, the Christian Social Union (CSU), even accused each other of blocking an agreement.   Juergen Trittin, a Greens negotiator, used Twitter to illustrate his view of the state of the talks: a clip of reggae star Jimmy Cliff singing,  The harder they come, the harder they fall - one and all.  Failure to clinch a deal could lead to new elections - a scenario none of the negotiating parties wants, for fear the far-right Alternative for Germany (AfD) could make further gains after surging into parliament in the Sept. 24 national vote. Such an outcome would be seen as a so-called black swan event that could weigh heavily on the euro. Merkel tried to break the logjam, at least on climate protection, by offering to reduce coal power generating capacity by 7 gigawatts (GW), sources familiar with the talks said. That is still shy of the 10 GW cut demanded by the Greens, but above an earlier offer of 5 GW. The chancellor is under pressure from her own conservative bloc, particularly the CSU, not to compromise too much to secure a coalition deal, especially on migrants.  The CSU fears losing further ground in a 2018 state election. At stake is a conservative plan to cap the number of people Germany will accept per year on humanitarian grounds at 200,000, a limit the environmental Greens reject.  I don t know if we can resolve all the discrepancies, all the disagreements,  said Joachim Herrmann, a senior member of the CSU, sister party of Merkel s Christian Democrats (CDU). FDP Secretary General Nicola Beer, in a Twitter posting, urged all sides to remain open to compromise:  Don t ask your counterpart for something he can t give. Otherwise you ll get nothing in the end.  Merkel is a skilled negotiator, renowned at European Union summits for building pressure on her negotiating partners and playing on their fatigue. She must leverage all these skills to secure the three-way  Jamaica  coalition, called that because the parties  colors match those of the Caribbean island country s flag.  A failure of Jamaica would be her failure,  wrote the mass-circulation daily Bild. Merkel s partners in Germany s previous  grand coalition  were the center-left Social Democrats (SPD), who have vowed to return to opposition after suffering their worst election result since 1933 in September s national vote. Alice Weidel, co-leader of the far-right AfD, criticized the would-be coalition partners for failing to reach a deal, telling daily Die Welt:  If the (conservative) Union, FDP and Greens don t reach an agreement soon, there should be new elections.  If negotiators agree to a deal after Thursday s talks, it must still pass muster with lower-ranking party officials. A key test would be a Greens conference on Nov. 25, when the party s rank and file would examine any coalition pact. 