The result comes after simultaneous votes at separate party congresses of Ms Merkel's Christian Democrats, their Christian Social Union sister party and outgoing leader Gerhard Schroeder's Social Democrats, who will share power in a rare "grand coalition".
Voting several hours after Ms Merkel’s party, the SPD’s green light was needed to clear the way for Germany’s first female chancellor to be voted into office by parliament, two months after her narrow victory in a general election.
A deal was hammered out by the party to share power on Friday after four weeks of negotiations since the election, which Ms Merkel said had left conservatives with no choice but to link up with their traditional rivals.
"There is no meaningful alternative to the coalition with the SPD," 51-year-old Ms Merkel said.
"The coalition has earned a chance to achieve something."
The tough talking east-German argued that most of her conservatives' main policy goals had been preserved in the government's manifesto, despite the horse-trading necessary to strike a deal with the Social Democrats.
Standing ovation
In what was described as his last speech to the party as chancellor before the vote, Gerhard Schroeder urged SPD members to back the coalition plan, stressing that the party will hold many of the key ministries including finance and foreign affairs.
"No one will be forced to cheer or love the grand coalition," Mr Schroeder said.
"But this government carries unmistakably, perhaps primarily, the imprint of the Social Democrats."
The party responded with a standing ovation for the 61-year-old Mr Schroeder, who led Germany as chancellor for seven years.
But his tough economic reform measures, which included more relaxed labour relations and tax laws to encourage business and cuts to welfare proved unpopular with the voting public and the party’s left.
Outgoing SPD leader Franz Muentefering, who won the party's firm backing as vice-chancellor and labour minister in the new government, said he recognised the new power sharing pact included some compromises that were difficult for the left to swallow.
"Governing is never easy, coalitions are never easy, but let us try," he said.
The parties agreed to raise value added tax (VAT) by three points in 2007 to 19 per cent - a move a handful of SPD delegates attacked as putting a heavy burden on the smallest incomes.
“Unbelievably big problems”
Germany recorded 5.2m people without a job earlier this year - a post-war record.
It also has a ballooning budget deficit, which Ms Merkel plans to tackle with cuts to public spending and higher tax rates.
Ms Merkel also wants other fundamental reforms to pull Germany's economy out of the doldrums - particularly reducing staff costs and red tape for employers.
Signalling the scope of the challenge, she urged her party to stay united as the new left- right government tackles Germany's "unbelievably big problems".
If approved by parliament on November 22, the new “grand coalition” between the two main parties will be the country's first since the 1960s.