A year before Merkel stands for re-election, the CSU saw its score in Bavaria plunge almost 20 points from the last election in 2003 to just over 43 percent, exit polls showed.
“A result like this is a nasty surprise,” Bavarian state premier Günther Beckstein told public broadcaster ARD. “The people want a government led by the CSU but apparently don't want the CSU to govern alone.”
The result is likely to prompt discord within the conservatives in the run-up to the September 2009 national vote and to exacerbate tensions within Merkel's three-year old "grand coalition" with the Social Democrats (SPD).
Not that the SPD benefited particularly from the CSU's poor result, with exit polls suggesting its share of the vote slipped slightly from the last state election to just over 18 percent. This is despite the party selecting the popular Foreign Minister Frank-Walter Steinmeier to run against Merkel next year and recently ditching its unpopular party chairman Kurt Beck.
"The new leadership of the SPD and the naming of its chancellor candidate had no effect - to the contrary, the SPD had its worst result since there have been elections in Bavaria," the Christian Democrats' secretary general Ronald Pofalla claimed.
Instead former CSU supporters gave their vote to the smaller parties, with the ecologist Greens, the pro-business Free Democrats and the independent Free Voters all seeing major gains, the exit polls showed.
Still, the SPD's dreadful showing didn't stop the party's state leader Franz Maget from celebrating the CSU's plunge and even suggesting a highly unwieldy four-party coalition to shunt the conservatives into the opposition.
"The CSU has been voted out in Bavaria," said Maget, adding there was the opportunity to forge a "new beginning" in the state.
The election represents a major change in Bavarian politics. For decades the CSU has been synonymous with the state, as much a part of its proud identity as lederhosen, beer, BMW and football team Bayern Munich.
Germany's 16 states already run much of their own affairs but Bavaria is a case apart, with a proud history going back to the sixth century, rich in traditions and home to picture-postcard towns, castles and landscapes.
The same size as Ireland, but with an economic output much larger, a third of Germany's 30 blue chip Dax companies - as well as 48 percent of the country's breweries - call the "Free State of Bavaria" home, with full employment in many areas and a cosy standard of living.
The CSU has presided over this success story, holding an absolute majority in the state parliament ever since 1962 - a dominance that experts say is unique in postwar Western Europe.
In the outgoing parliament, the CSU held two-thirds of the 180 seats but now it will be forced to form a coalition and take into account another party's point of view - a situation no-one in the current CSU leadership has experienced.
The reasons for this fall from grace are many and complex, analysts say. For one thing, recent policy debacles over issues such as education, a smoking ban and the scrapping of a multi-billion euro maglev train link have given the CSU a reputation of clumsiness and have given rise to a feeling that change is needed. Another is the unpopularity of the current CSU leadership, party chairman Erwin Huber and Bavarian premier Beckstein, but other factors go deeper.
As Bavaria has modernised, its society has changed, with environmental consciousness up and church attendance down - and the CSU has lost touch, experts say. It also fails to strike a chord with Bavaria's immigrant population of over one million.
"The CSU brought Bavaria into the modern age but now the modern age is hitting back," the Süddeutsche Zeitung daily said last week.