POTSDAM, Germany Two million German public-sector workers will get a pay rise of 6.3 percent over a 24-month period, according to a government official leading the talks, ending a labour dispute that has disrupted services across Germany.
The deal ends the threat of a broader walkout following a series of warning strikes that have disrupted Europe's largest economy.
Wage rises in many other euro zone countries have been steeper than in Germany, fuelling the economic divergence that has underpinned the debt crisis in the single-currency area.
Interior Minister Hans-Peter Friedrich, who had led the talks with the Verdi union, announced the breakthrough shortly before 7 a.m. (0500 GMT) on Saturday after all-night negotiations in Potsdam, a suburb of Berlin.
"This wasn't a marathon, this was an Ironman (triathlon)," Friedrich told reporters at the end of the final round of talks that started on Friday.
Finance Minister Wolfgang Schaeuble, speaking at a meeting of European finance ministers in Copenhagen, called it an acceptable deal, adding he was pleased strikes had been averted.
"It's a result that goes to the outer limits of what the federal government and communities can afford but it is all in all a reasonable outcome and I believe it's a good thing that we'll avoid another week of strikes," he said.
Bundesbank president Jens Weidmann said he did not believe the deal would serve as a model for other unions and he said the German central bank would closely analyse the agreement.
"I believe it is not a model for other sectors but instead has to be analysed on its own," he said. He added that the decisive question is how much of a role did the high energy prices have in the wage negotiations.
Verdi leader Frank Bsirske said it was difficult to accept the deal but at least the union had managed to narrow the gap to the pay rises workers in the private sector have been receiving. The annual inflation rate in Germany is about 2 percent.
"It's regrettable that we weren't successful in getting more for the lower wage groups," an exhausted Bsirske said.
Verdi, one of Germany's biggest and most influential unions representing 2 million public-sector workers, had been seeking a 6.5 percent rise for one year after years of accepting modest pay deals. Verdi rejected an earlier offer of 3.3 percent.
Overall, wages for some 9 million German workers are up for negotiation this year and, despite Bundesbank's remarks, some economists expect the public sector deal to serve as a model for other unions.
With Germany's economy growing strongly, higher-than-expected tax revenues gave the federal government and local communities more scope for pay rises. The union had pointed that out in the course of 55 hours of talks and argued they accepted modest pay deals in leaner past years.
Under the deal, public-sector workers will receive a 3.5 percent pay rise retroactive to March 1. They will receive a further 1.4 percent in January 2013 and another 1.4 percent pay rise in August 2013.
Late on Friday evening, employers had signalled a pay rise of up to 5.8 percent over two years was possible before they upped their effort to 6.3 percent. One last sticking point was that the employers wanted the deal to start April 1 rather than March 1. The union rejected that demand.
The pay rise will cost the federal government 550 million euros, Friedrich said. It will cost communities some 2.2 billion euros in 2012 and about 4.3 billion euros in 2013.
(Reporting By Axel Hildebrand; additional reporting by Annika Breidhardt in Copenhagen; Writing by Erik Kirschbaum; Editing by Maria Golovnina)