BERLIN, Oct 11 (Reuters) - Germany"s Social Democrats began in-depth exploratory coalition talks on Monday with two smaller parties and expressed confidence that the three would form a new government this year following an inconclusive national election. The centre-left Social Democrats (SPD) narrowly beat the conservatives, whose outgoing Chancellor Angela Merkel has governed since 2005, in the Sept. 26 federal ballot, but did not win a majority. The SPD is seeking to form a coalition with the Greens and the business-friendly Free Democrats (FDP), which finished third and fourth respectively in the election. SPD vice chairman Kevin Kuehnert expressed optimism that a "traffic light" coalition - named after the party colours of the SPD, the FDP and the Greens - would be formed this year. "I am very firmly assuming that this will happen," he told broadcaster ARD. "The talks have started well, very trusting." Unlike many other European countries, where the president or monarch invites one party leader to try to form a government, in Germany it is up to the parties themselves to decide who should ally with whom. Their decisions will determine Germany"s political future after 16 years with Merkel at the helm, its appetite to shape Europe"s largest economy for the digital era, and the extent of its willingness to engage with allies on global issues. The FDP does not want to raise taxes, putting it at odds with the Greens and SPD, though the two smaller parties worked hard to find common ground and a basis for working together in initial bilateral talks. The CDU/CSU conservative bloc, which came second in the election, could in principle also seek to form a coalition government to stay in office, but it is still digesting its unexpected defeat. The Christian Democrats" (CDU) general secretary Paul Ziemiak said on Monday that local party bosses would meet later this month to decide how a new party leadership should be chosen.