Her decisive victory in the September 27 general election allowed her to dump her conservatives' traditional rivals, the Social Democrats, in favour of the smaller, pro-business Free Democrats, giving her more scope to set her own course.
Always something of a misfit in the typically staid man's world of German politics, Merkel enjoyed a stellar rise from East German bumpkin to the leader of Europe's biggest economic power, now in her second four-year term.
The 55-year-old trained physicist developed the fighting instinct and chameleon-like qualities under communism that propelled her to become Germany's first female leader and the youngest person to become chancellor.
An apple-cheeked pastor's daughter, Merkel completed her unlikely ascent to power in 2005 as she took the reins of an unwieldy "grand coalition" of her conservatives and the Social Democrats after an inconclusive election.
An admittedly less-than-gifted public speaker, Merkel has relied on meticulous preparation, dry humour and modest leadership to lead the European Union's most populous country.
But critics accuse her of passivity, waiting out feuds until a compromise has emerged and depriving the administration of clear direction.
"What, and whom, does Angela Merkel stand for?" the daily Berliner Zeitung
asked in a recent analysis of her "mysterious" character. "Nobody knows. And that is the secret to her success."
Her cautious approach also drew fire as the financial crisis whipsawed through global markets late last year, with Merkel dubbed "Madame Non" by fellow leaders expecting a bigger German stimulus effort.
Now her new centre-right alliance has come under fire for planning some 24 billion euros (36 billion dollars) in tax relief over the next four years despite a growing hole in the public purse. Merkel says the resulting economic growth will put Germany's fiscal house back in order.
She has racked up a number of foreign policy triumphs including a hard-fought compromise on the EU budget in 2005 and a climate deal under her 2007 G8 presidency that earned her the admiring nickname "Miss World."
Merkel also mended what she saw as her predecessor Gerhard Schröder's strident break with Washington over the Iraq war. Next week, she will become the first German leader since 1957 to address both houses of the US Congress.
Angela Kasner, as she was known then, left Hamburg, West Germany a few weeks after her birth when her father, a Protestant preacher, decided to work in the communist East.
Locals remember her as a brilliant student who learned compromise and discretion early on to cope as a Christian in a totalitarian state.
Merkel earned a physics doctorate and stayed out of politics until the Berlin Wall fell 20 years ago. In 1990 she joined the conservative Christian Democrats (CDU) and won a parliamentary seat in the former East Germany, beginning her rise to the chancellery.
Merkel had to endure the fond but patronising nickname "the girl" bestowed by her mentor, then chancellor Helmut Kohl, who made her minister for women's issues and later environmental affairs.
But in 2000, the frumpy newcomer rose to the head of the CDU when she alone had the courage to tell Kohl to quit as party chairman in a slush fund scandal.
It earned her powerful enemies in the CDU, a party dominated by Roman Catholic, west German family men where she has always been something of a misfit as a twice-married childless woman from the east.
Her husband of 11 years, chemist Joachim Sauer, is so publicity-shy he opted not to attend Merkel's inauguration.