* SPD drops tax hike demand, signalling ready to negotiate
* Merkel keeps pressure on SPD by meeting Greens leaders
* SPD leaders need to persuade wary supporters on coalition
By Erik Kirschbaum
BERLIN, Oct 7 (Reuters) - Germany's opposition Social Democrats have signalled their readiness to join Angela Merkel's conservatives in a right-left 'grand coalition' by jettisoning a key election demand for higher taxes on the rich.
Two weeks after losing the election to Merkel, SPD leaders have stopped speaking disparagingly of becoming Merkel's junior partners again - a thankless supporting role the SPD filled in 2005-2009 and which they blamed for a plunge in support.
However, it remains to be seen whether grassroots SPD members will back the moves towards a grand coalition, given their fears that the identity of Germany's oldest party could erode further in a government led by the popular Merkel.
Her conservatives emerged as the dominant force on Sept. 22 but fell short of a majority, winning 311 seats in the 630-seat parliament versus 192 for the SPD. The Greens, another potential partner for Merkel, got 63 seats and the radical Left 64.
Keeping the pressure on the SPD, Merkel's Christian Democrats (CDU) and Bavarian allies, the Christian Social Union (CSU), will meet the Greens on Thursday for exploratory talks before a second meeting with SPD leaders next Monday.
Full-scale talks with either the centre-left SPD or the Greens could begin in mid-October and last a month or more.
After a first meeting with Merkel and conservative leaders on Friday, SPD chairman Sigmar Gabriel and his allies abruptly softened their demand for higher taxes, saying it was not carved in stone if the conservatives could come up with other ways to raise funding for infrastructure, education and local councils.
"For us tax hikes are not an end in itself," Gabriel said. "If the CDU/CSU doesn't want this, they must explain what alternative there is to finance these tasks."
"I'd rather see the SPD in a government shaping policy than outside looking in," Gabriel said.
The comments marked a departure from the language right after the election when SPD leaders professed little interest - and even urged Merkel to talk to the Greens about a government.
Giving up tax increases runs counter to the SPD's campaign platform, which called higher taxes an "important means to promote solidarity and counter growing social division".
The SPD wanted to raise the top income tax rate from 42 percent to 49 percent for people earning over 100,000 euros. Its retreat on tax hikes is an indication the party is more eager than a fortnight ago to join forces with Merkel.
"It's surprising to see the SPD sounding so eager so soon to be in the next government," said Gero Neugebauer, political scientist at Berlin's Free University. "But it won't be easy for Gabriel to sell this to the rank and file. It's a tough piece of meat and he's going to have to marinate it for a while."
The SPD plans to allow its 472,000 members to vote on any coalition agreement with the CDU/CSU. As many SPD members are sceptical, the unprecedented move is fraught with risk and could scupper the formation of a coalition if members rejected it.
Thomas Jaeger, a political scientist at Cologne University, said the SPD leaders shifted because they realised their usual allies, the Greens, are competing with them to get into power.
"If the Greens had refused to talk to Merkel the SPD would have had a stronger hand," he said. "Now they're competitors. SPD leaders want to get into power. It remains to be seen if they can persuade their members that it's the right move."