Sigmar Gabriel, the leader of Germany's Social Democrats, junior partners in Merkel's power-sharing government, told reporters he would become her vice-chancellor and head up what the media labelled a "super ministry" responsible for the economy and energy policy.
Frank-Walter Steinmeier will return as foreign minister, a job he held under Merkel during her first term 2005-9 when she also led a left-right "grand coalition".
The Social Democrats (SPD) kept a pledge to fill half of the cabinet seats allotted to them with women.
Left-wing firebrand Andrea Nahles, the SPD's current general secretary, is to become labour minister, sharing responsibility for rolling out Germany's first national minimum wage -- a condition the SPD set for the alliance with Merkel.
Party vice-chairwoman Manuela Schwesig is to take charge of family affairs, and SPD treasurer Barbara Hendricks is headed for the environment ministry.
Heiko Maas, economy minister in the western state of Saarland, will head up the justice and consumer affairs ministry.
Gabriel said another SPD deputy leader, Aydan Ozoguz, would become state minister for immigration, refugees and integration - the highest office ever held in Germany by a woman from the country's three-million strong Turkish community.
The "super ministry" Gabriel, a former environment minister, will lead is to manage Germany's transition away from nuclear power and toward greater use of renewables.
The brief stems from Merkel's abrupt decision in the wake of Japan's Fukushima nuclear disaster in March 2011 to shut down all of Germany's reactors by 2022.
The radical policy shift has seen energy costs rise for consumers and driven up greenhouse gas emissions as the country turns to coal to fill a power supply gap.
Given the complexity of the task, many analysts saw the appointment as a poisoned chalice handed by Merkel to Gabriel, her likely challenger in 2017 should she stand for a fourth term.
"We have hard work ahead of us," Gabriel acknowledged but added: "This cabinet make-up fulfils the wishes of the SPD."
Analyst Claire Demesmay of the German Council on Foreign Relations, a Berlin-based think tank, said Merkel and her returning foreign minister Steinmeier had a good working relationship despite different takes on complex countries such as Russia.
"He has always advocated a more pragmatic approach on Russia policy by calling for dialogue while Angela Merkel has taken a harder line," she told AFP. "You can expect perhaps different priorities but I don't expect a real clash."
Merkel was to hold a news conference later Sunday to announce her conservatives' picks for the cabinet.
Finance Minister Wolfgang Schäuble, the main architect of Germany's tough-love response to the eurozone crisis, is to remain in his post.
But a surprise appointment widely reported Sunday was mother-of-seven Ursula von der Leyen as Germany's first female defence minister.
Merkel is to be formally elected by the Bundestag lower house of parliament on Tuesday, when the new cabinet will also be sworn in.
Germany, Europe's top economy has endured nearly three months of political limbo since a September general election saw a triumph for Merkel and her Christian Union bloc but left them short of a ruling majority.