Merkel's Christian Democratic Union (CDU) was at the receiving end of voter anger, suffering defeats in two out of three states in Sunday's elections - including traditional stronghold Baden-Württemberg.
The stinging result for the conservative CDU was accompanied by a surge in backing for the right-wing populist Alternative for Germany (AfD), which had sparked outrage by suggesting police may have to shoot at migrants to stop them entering the country.
The elections were the biggest since Germany registered a record influx of refugees that reached 1.1 million in 2015, and largely regarded as a referendum on Merkel's decision to open the doors to people fleeing war.
The mass-circulation Bild newspaper described it as a "day of horror" for Merkel, as calls multiplied for her to change tack.
But her spokesman shot that down.
"The federal government will stay its refugee policy course, fully determined, at home and abroad," the spokesman, Steffen Seibert, told a news briefing.
"The goal must be a common, sustainable European solution that leads to a tangible reduction of the number of refugees in all (EU) member states."
Seibert said Merkel would continue to pursue a strategy of working to bolster the security of the EU's external borders and cooperating with Turkey to reduce refugee flows.
The German leader herself, who has consistently refused to impose a cap on refugee arrivals, was expected to give her first reaction to the polls in the early afternoon.
'Makes no sense'
While they have no direct impact on her chancellorship, the regional polls in the southwestern states of Baden-Wuerttemberg and Rhineland-Palatinate as well as Saxony-Anhalt in the east served as a key test ahead of general elections in 2017.
The results could also strengthen the hand of her adversaries, including strident critics in the CDU's Bavarian sister party, the CSU.
The main reason for the poor CDU showing "is the refugee policy. It makes no sense at all," CSU chief Horst Seehofer said at a party meeting on Monday.
Demanding changes, Seehofer said: "It can't be that after such an election result, the answer to the electorate is: everything will go on as before."
Merkel also risks isolation at a meeting of EU leaders opening Thursday, when they will seek to finalise a deal with Turkey on stemming the migrant influx.
The chancellor has attacked a decision by Balkan states to close their borders to refugees, but Bavarian daily Nuernberger Nachrichten noted that "she is benefiting more than anyone from the border closures that she is criticising".
"After this election, Merkel must, more than ever, give an explanation."
The German press said the results delivered a clear message to Merkel.
Spiegel Online described it as "Black Sunday for the CDU".
"Merkel will now have to live with the accusation that she has allowed the AfD to establish itself to the right of the CDU," Spiegel said in an editorial.
For most of the last decade, Merkel enjoyed stellar popularity ratings as she pushed middle-ground policies which helped her party capture ground from the centre-left Social Democratic Party (SPD). But critics say it has left her conservatives' right flank exposed.
In Sunday's vote, the AfD captured seats in all three states and gained as much as one in four votes in the eastern state of Saxony-Anhalt, emerging as the second biggest party there.
Austria's far-right Freedom Party hailed the AfD's success as a win against the "EU juggernaut".
Nevertheless, the irony is that Sunday's polls showed there is no obvious successor to Merkel, as the CDU's biggest mainstream challenger and junior coalition partner -- the SPD -- emerged weakened in two out of three states where it came in behind AfD.
And Julia Kloeckner, touted previously as a possible CDU successor to Merkel, failed to lift the party to a win in Rhineland-Palatinate with a campaign that challenged Berlin's line on asylum policy.
Even Seehofer acknowledged that Merkel was still the right chancellor, while the Frankfurter Allgemeine Zeitung questioned who had the clout to force her to reverse her stance on refugees.
"The party has less choice than ever" for its succession, it noted.