Merkel could now try to convince the Social Democratic Party, which has been the junior coalition partner in her government since 2013, to return to the fold.
"It is a day of deep reflection on how to go forward in Germany", Merkel told reporters.
"As chancellor... I will do everything to ensure that this country comes out well through this hard time", she said.
Preliminary coalition talks broke down late Sunday after the pro-business Free Democrats bowed out of the negotiations with Merkel's conservative bloc and the left-leaning Greens.
Merkel's conservative party has been trying to reach a comprise with the FDP and Greens over immigration, climate change, European Union and taxes but hasn't reached a deal on any issue. The Free Democrats also expressed concern about what the moves would mean for jobs and Germany's economic competitiveness.
Options include new elections or a minority government, unprecedented in the country's post-war history.
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Germany could therefore likely be forced to hold new elections. That could mean more instability for one of the world's most important economies. FDP head Christian Lindner said that after weeks of negotiations the parties could not find a "basis of trust".
The Guardian writes: "In a month of talks, Merkel has often cut a passive figure as party representatives found themselves at loggerheads over issues such as the question of how numerous migrants who found their way to Germany in 2015 and 2016 would be allowed to be reunited with their families".
But that is not without peril for Merkel, who would face questions from within her party on whether she is still the best candidate to lead them into a new electoral campaign.
Simon Schuetz reported: "Looking at the composition of the AfD electorate, it's apparent that the party was very successful in mobilizing former non-voters".
The refugee issue helped fuel the rise of the right-wing Alternative for Germany (AfD), which won almost 13 percent of the vote to become the third-largest party in the Bundestag after pulling votes from across the political spectrum. "Even the Social Democrats lost about half a million voters to the AfD".
The cap is opposed by the Greens, who also want to preserve a rule allowing successful asylum seekers to bring family members to join them - though the CDU's Kloeckner implored the Greens to acknowledge this as only a "subsidiary right". "We were voted for to reverse the current trends, but we couldn't reach an agreement".