The Bavaria poll result shattered old certainties for the CSU, which had long dominated politics in the state known for its castles, Oktoberfest and crucifixes on classroom walls.
The biggest victor was the Greens, who surged to become the second strongest party with 18 percent, while the far-right Alternative for Germany (AfD) celebrated its entry into the state assembly with 10 percent.
The Greens, who more than doubled their share of the vote to 17.8 percent, attracted support from more liberal CSU voters and from those who traditionally vote for the left-leaning Social Democrats (SPD), who won just 9.5 percent.
Spiegel Online commented that although "the epicentre of the political quake was in Bavaria ... the tidal wave could sweep away the federal government". "Talk will increase ever more about the end of the Merkel era", said Fred Kempe, president of the Washington-based Atlantic Council think-tank.
Merkel defended her policy, but admitted that the performance of her governing grand coalition was disappointing. "Since Hallstein, we have not had a Commission president", she said, referring to Walter Hallstein, the CDU politician who became head of the European Economic Community, the forerunner to the EU, in 1958.
Finally, the biggest election losers, the centre-left Social Democrats (SPD), reluctantly came on board, but Merkel soon faced fire from another quarter - her erstwhile ally, the CSU Interior Minister Horst Seehofer.
"Of course I hope for a good result for the CSU", she said Friday.
Polls indicate the CSU will lose its absolute majority in Bavaria on October 14 as voters in the state are expected to turn to the ecologist Greens and the AfD.
The poll result showed that the tactic backfired: Bavarian voters most anxious about immigration chose the AfD, while those turned off by the harsh new tone drifted to the Greens whose motto was "heart, not hate". "For the CSU, this strategy backfired".
Asked if he would resign as CSU leader, Seehofer told broadcaster ZDF he was not ruling this out but there were many reasons for the party's weak result which had to be analyzed.
Mrs Merkel has seen her popularity plummet since her decision to open Germany's borders to immigrants and refugees in 2015. A four-way alliance without the CSU might be mathematically possible, but impractical.
Chancellor Angela Merkel's Christian Democratic Union (CDU) accused the AfD of distorted generalizations about Islam and stereotyping Muslims as violent.
For Merkel, now often labelled a lame duck leader in her fourth and final term, it would further raise political pressure two weeks ahead of another risky vote, in the central state of Hesse.
Merkel said last month "I categorically rule this out", sticking to her position not to work with the party that says Islam is not compatible with the German constitution.
As reported by Deutsche Welle (DW), Germany's global broadcaster, the CSU (Merkel's allies in Bavaria) are fighting to keep conservative voters from switching to the far-right populists, who have found a stronghold of support in Deggendorf.
Jan Techau at The German Marshall Fund of the United States think-tank described Merkel as "exhausted and weakened".
"And yet, her strategy to keep the Union firmly in the middle does not look so silly after this result for the CSU", he said. "Whether this temporary reprieve can hold or not will depend on the result in Hesse".