If the campaign was widely decried as boring, its outcome was a bombshell – a populist surge weakened Merkel's conservatives as well as the centre-left Social Democrats, handing both their worst results in decades.
“A nightmare victory for Merkel,” said Germany's best-selling daily Bild.
After 12 years in power and running on a promise of stability and continuity, Merkel's CDU/CSU bloc scored 33 percent, according to final results, against 20.5 percent for the Social Democrats under challenger Martin Schulz, who pledged to go into the opposition.
The election spelt a breakthrough for the anti-Islam Alternative for Germany (AfD), which with 12.6 percent became the third strongest party and vowed to “go after” Merkel over her migrant and refugee policy.
News weekly Der Spiegel said Merkel had no one but herself to blame for the bruising she got from voters.
“Angela Merkel deserved this defeat,” Spiegel's Dirk Kurbjuweit wrote, accusing her of running an “uninspired” campaign and “largely ignoring the challenges posed by the right”.
The entry of dozens of hard-right nationalist MPs to the glass-domed Bundestag chamber breaks a taboo in post-World War II Germany.
“We will take our country back,” vowed the AfD's jubilant Alexander Gauland, who has recently urged Germans to be proud of their war veterans and said a government official who is of Turkish origin should be “dumped in Anatolia”.
While joyful supporters of the AfD – a party with links to the far-right French National Front and Britain's UKIP – sang the German anthem at a Berlin club late Sunday, hundreds of protesters shouted “Nazis out!”
All other political parties have ruled out working with the AfD, whose leaders call Merkel a “traitor” for allowing in more than one million asylum seekers since the height of the refugee influx in 2015.
While Germany still digests the rise of the right-wingers, Merkel's inner circle will prepare Monday for what could be lengthy coalition talks ahead with a number of smaller parties.
Party leaders will meet at 0700 GMT at Berlin headquarters to draw their conclusions from the election that some have dubbed a referendum on the refugee crisis, a contentious issue especially for her Bavarian CSU allies.
CSU chief Horst Seehofer, a vocal critic of Merkel's asylum policy, called the poll outcome a “bitter disappointment” and vowed to close the “open flank” on the right before state elections next year, signalling more trouble ahead.
A weakened Merkel must now find a new junior partner after the Social Democrats (SPD) declared they would go into opposition, to recover the support they lost while governing in Merkel's shadow.
Schulz, putting a brave face on the defeat, vowed that the 150-year-old traditional workers' party would serve as “the bulwark of democracy in this country” and stop the AfD from leading the opposition.
This will likely force Merkel to team up with two smaller, and very different, parties to form a lineup dubbed the “Jamaica coalition” because the three parties' colours match those of the Caribbean country's flag.
One is the pro-business and liberal Free Democratic Party (FDP), which scored a 10.7-percent comeback after crashing out of parliament four years ago.
The other is the left-leaning, ecologist Greens party, a pioneer of Germany's anti-nuclear movement which won 8.9 percent on campaign pledges to drive forward the country's clean energy shift and fight climate change.
The far-left Die Linke, traditionally an opposition party, took 9.2 percent of votes.
Weeks, if not months, of jockeying and horse-trading could lie ahead to build a new government and avoid snap elections.
The FDP has governed with the conservatives before, and the two have in the past been seen as “natural allies”.
But its leader Christian Lindner has pointed to new “red lines”, voicing scepticism especially on French President Emmanuel Macron's plans for a single eurozone budget, which Merkel has cautiously greeted.
The Greens, meanwhile, sharply differ with the FDP and CSU on key issues from immigration to the environment, pushing to expand wind farms, phase out coal and take to task car makers over the “dieselgate” emissions cheating scandal.