Lower Saxony, a region of 6.2 million voters that is governed by the same centre-right alliance Merkel governs with n Berlin, will elect a new parliament. Analysts say the race has narrowed to a dead heat.
Boosting the stakes further is the fact that state premier David McAllister, a charismatic half-Scottish conservative, is widely seen as a potential successor to Merkel.
The election is the last electoral test before September, when polls for Bavaria will take place and then national elections that will determine whether or not Merkel gets a third term in office.
First voting result figures are expected at 6pm CET, following the closing of polling stations. Polling opened at 8am.
The election will be a test for the governing parties, as well as for the Social Democratic Party (SPD) opposition, which is weighed down in the polls because of its gaffe-prone leader and Merkel challenger Peer Steinbruck.
The SPD hopes for a change of power in Lower Saxony by forming a coalition with the Greens.
The state, which is home to Europe’s top automaker Volkswagen, swung to the right in 2002.
Merkel’s liberal ally and pro-business Free Democrats (FDP) has much at stake in the vote.
If it receives less than five percent, it will no longer be represented in the regional parliament, a result which would topple the coalition with McAllister’s conservative CDU.