Chancellor Gerhard Schroeder marked the birth of a new "Berlin Republic" today by taking up his duties in the renascent capital of Germany, which officially reclaimed its role as the center of national government 54 years after World War II.

Fresh from a long vacation in Italy, Schroeder confronts a challenging political agenda as he struggles to reassert control over his fractious government, push through an ambitious and controversial budget reform package and regain the confidence of voters before five state elections.

The extended summer break allowed the German government to transfer parliament, ministries and 12,000 workers from the Rhineland city of Bonn in western Germany to this sprawling metropolis 50 miles from the Polish border. But the hiatus also dramatized Schroeder's mounting problems with labor leaders and leftist members of his ruling Social Democratic Party who reject his plans to curtail the role of the state in German society.

Schroeder insists he must press ahead with cutting Germany's generous welfare and pension programs to attract investment, create new jobs and sustain the ability of the world's third biggest economy to compete in global markets. "There can be no wavering," he said. "We have to stay on course."

Before settling into a temporary office here that was previously occupied by Communist rulers of the defunct East Germany, Schroeder met with other prominent Social Democrats and declared that he was determined to shove the party toward a more business friendly course.

At a meeting of party executives in the southwestern town of Saarbruecken--the power base of his nemesis, the leftist former party chairman Oskar Lafontaine--Schroeder announced that the Social Democrats had agreed to review their basic policy principles at a party congress in December.

The party's internal conflict has already exacted a heavy toll in public opinion polls. A majority of German voters now say the governing alliance between Social Democrats and Greens will collapse before the end of its four-year term. The opposition Christian Democrats have gained steadily in voter support and now hold a 10-point edge over the Social Democrats. Meanwhile, Schroeder's approval rating has fallen to its lowest level yet: 23 percent, against the 54 percent he enjoyed upon taking office a year ago.

Schroeder's party faces electoral tests in five state elections this autumn. The outcomes will determine whether the government can maintain a majority in the upper house of parliament to push through its legislation. The results could also affect sentiment among Social Democrats about Schroeder's own future.

For now, Schroeder says he simply wants to restore order within the government, unity within his party, and ensure a smooth transfer of the government from Bonn to Berlin. As the symbol of a postwar generation of German politicians, Schroeder is eager to prove that his country is ready to move on to a new phase as a "normal" European country that is conscious of, but not crippled by, its history.

But the past is proving to be difficult to escape. The decision to house government ministries in several buildings notorious for their links to the Nazi past has stirred controversy.

The Finance Ministry now occupies the aviation ministry where Luftwaffe chief Hermann Goering orchestrated Hitler's air war. The Labor Ministry is housed at the old headquarters of Nazi propaganda chief Joseph Goebbels, while the Foreign Ministry will operate out of the former Reichsbank, where gold looted from concentration camp victims was stashed in the basement.

Schroeder scoffs at any historical significance. He says he and his ministers will not be haunted by any Nazi "ghosts" as they embark on their work in the reborn capital of a unified Germany. "Our politics will not be affected by the offices where our ministers are sitting," he said.

CAPTION: Chancellor Gerhard Schroeder celebrates the return of the national government to Berlin with a huge layer cake presented to him by the city.