Talks on settling a pay dispute between German public workers and the government collapsed today, moving the country closer to a crippling strike and a new crisis for Chancellor Gerhard Schroeder.

While negotiators sought arbitration, the two sides remained far apart after union leaders rejected an offer from federal, state and local authorities.

"We're preparing for a long conflict," Frank Bsirske, the head of the service workers union, said on ZDF television.

Labor strife is the latest in a series of setbacks for Schroeder, whose popularity has tumbled since he announced tax hikes and spending cuts to fill a budget shortfall disclosed after he was reelected in September. The deficit leaves little room for pay raises for almost 3 million civil servants, who last went on strike 10 years ago.

An Infratest poll indicated that a third of Germans believed Schroeder would step down early, while two-thirds said he would survive his four-year term.

Edmund Stoiber, Schroeder's conservative opponent in the election, has repeatedly predicted the government will fall apart before the next election, in 2006. On Wednesday, Schroeder suffered another setback when the supreme court threw out his plans for attracting more skilled foreign workers.

Germans got a taste of the possible strike disruptions this week when limited walkouts halted public transport and forced airlines to cancel hundreds of flights from Frankfurt and Munich.

Germany's main airline, Lufthansa, said the walkouts caused millions of dollars in losses. Any repeat of the last major strike, in 1992, when an 11-day walkout left garbage piled in the streets, would be much more costly and could weaken Schroeder.

Announcing the breakdown of the talks with public workers, Interior Minister Otto Schily insisted the money simply wasn't there for pay raises. Cash-strapped authorities could only fund a more generous offer by laying off staff, he said, complaining of the union's "intransigent position."

Unions are seeking a raise of more than 3 percent to prevent pay for public workers -- from garbage collectors to opera employees -- from falling behind that of workers in other industries.

Strikes are rare in Germany, where consensus usually dominates labor relations. But this year's pay talks have been tough because of the economic slump and labor leaders' intention to make up for moderate increases in past years.