The agreement ends a three week political deadlock and will bring Chancellor Gerhard Schroeder's seven years in office to a close.
Merkel said that under the agreement most seats in the new Cabinet would go to Social Democrats, including such top jobs and foreign minister, the Associated Press reported.
She also said that good relations with the United States would be a priority. In recent years, U.S.-German relations have been strained over Schroeder's opposition to the war in Iraq.
"I am convinced that good trans-Atlantic relations are an important task and they are in Germany's interests," Merkel said
Germany's leadership stalemate began Sept. 18 when voters ousted Schroeder's ruling coalition of Social Democrats and Greens but failed to give a majority to Merkel's right-center coalition. That forced the Social Democrats and her Christian Democrats to seek a power-sharing deal across political lines.
Merkel argued that as the head of the party with the largest number of seats, she deserved the nation's top political office. Not only is she the first woman to lead Germany; she will also be the first chancellor from the formerly communist east.
Under the terms of the agreement, Social Democrats would head the foreign, finance, labor, justice, health, transport, environment and development ministries, while the Christian Democrats and their allies, the Christian Social Union, would lead the defense, interior, agriculture, families and education offices.
The chairmen of Schroeder's party, Franz Muentefering, said fighting unemployment would be the government's top task, and that both sides had to work together.
"Such a coalition can be successful if both partners ... know they are responsible not just for the ministries they hold but for the entire spectrum of policy," he said, according to the AP.