Intensive efforts to rescue the social partnership process will be made next week when employers, unions and the Government attempt to secure a new pay deal.
A 5 per cent pay increase broken into two stages has emerged as a possible formula to bridge the gap between the two sides, which has widened as a result of the Budget.
There is increasing pessimism, however, that a deal can be done, and a return to free-for-all pay bargaining for the first time since the 1980s is on the cards.
Unions insist they cannot sign up to an agreement that does not maintain members' living standards, which requires pay increases to at least match inflation.
The employers' body, IBEC, is holding to its demand for a six-month pay pause followed by pay rises in low single figures.
The "stealth taxes" introduced in the Budget, combined with yesterday's announcement of an increase in motor tax, have exacerbated the problem.
Union leaders say the new taxes will push inflation above 5 per cent next year and their pay demands have had to be adjusted accordingly.
A possible way out being mooted last night was a two-phased increase of, for example, 2.5 per cent at the start of the year, followed by a similar increase six months later.
This would have benefits for both sides. As the overall increase for the year would be below 5 per cent, Irish business would recover some of the competitive advantage lost during the Programme for Prosperity and Fairness (PPF).
Unions, on the other hand, might be able to "sell" the deal to members on the basis that the final figure had kept pace with inflation.
They would also require significant concessions in other areas, however, including union recognition and statutory redundancy payment levels.
The pay rise, if agreed, would come into effect at different times of the year for workers in different sectors.
After several weeks of talks without progress, a determined effort to break the deadlock is expected when negotiations resume on Monday.
The prospects of a deal emerging to succeed the PPF are likely to be much clearer by the middle of next week.
Several sources predicted last night that the discussions would break down at some point, with one or other party walking out.
The Government would then be likely to intervene in a last-ditch attempt to save the partnership process. "It is only at that point that people will really start showing their hands," a source involved in the talks said.
Pessimism on the union side that an agreement can be done is based on the employers' refusal, publicly or privately, to shift from their demand for a pay pause.
The Government is also perceived by union leaders to be adopting a more hard-line, pro-employer stance than in previous negotiations.
"There is a belief that in the new Cabinet the balance has shifted towards (Finance Minister) Charlie McCreevy and others, including the PDs, who believe in 'tough government' and are less interested in keeping the unions on side," another source said.
Negotiations are also complicated by the benchmarking issue, which has given rise to tensions between unions in the public and private sectors.
Public servants are on course to pocket pay rises averaging 8.9 per cent, recommended by the benchmarking body last July, above any basic pay increases.
Mr McCreevy announced on Wednesday that he was setting aside €565 million to pay the first quarter of the benchmarking bill, which is backdated to December last year.
Concerns on the part of private sector unions that their public sector counterparts were focusing on benchmarking to the exclusion of the wider union agenda were forcibly expressed at Thursday's executive committee meeting of the Irish Congress of Trade Unions.
An understanding was reached at the meeting and since then both sides have been carefully emphasising their common concerns.
However, if private sector unions fail to do a deal on pay, those in the public sector will reach their own accommodation with the Government.
Mr McCreevy has made it clear he will not pay out on benchmarking until negotiations on a basic pay rise are also concluded. As a consequence, public sector unions will do their own deal if necessary.
