European markets opened lower after the Free Democratic Party (FDP) walked out of discussions over differences in migration and climate change policy.
But they swung higher as it emerged the FDP was likely to support a minority government led by chancellor Angela Merkel.
The FTSE 100 reversed losses to trade seven points higher at 7,387 while the German DAX 30 was up 0.4%.
The euro pared some of its losses but remained 0.5% down against the pound at 88.8p.
Merkel had been hoping to forge a coalition between her CDU-CSU grouping, the pro-market FDP and the leftwing Green party.
'Angela Merkel has been the glue that has held the European Union together for the past 12 years, a stable force in turbulent times,' said Rebecca O'Keeffe, head of investing at Interactive Investor.
'With almost unsurpassed political experience, markets will want Germany to find a quick solution, preferably one that leaves Mrs Merkel in situ.'
On the UK stock market, the big movers were to be found outside the FTSE 100.
Among 'mid-cap' stocks, Diploma (DPLM) surged 12.9% to £12.08 after the industrial component distributor reported a 19% rise in full-year profits.
Thomas Cook (TCG) was up 4.2% at 116p after analysts at HSBC began coverage of the travel group with a 'buy' rating and Panmure Gordon raised its rating to 'hold' from 'sell'.
Spire Healthcare (SPI) was the biggest faller, down 8.3% at 247.2p after private hospital group Mediclinic (MDCM) said it would not make another offer for the rest of the company it does not already own.
Mediclinic, which already owns 30% of Spire, had been an earlier bid which was rejected. Shares in Mediclinic were down 1.4% at 548.5p.
On the FTSE Small Cap index, shares in Xaar (XAR) tumbled 15.5% to 386p after the inkjet printing technology group issued an unscheduled trading update indicating an anticipated ramp in second half sales was not coming through.