Merkel's Christian Democratic Union was at the receiving end of voters' anger, suffering defeats in two out of three states in regional elections -- including its traditional stronghold Baden-Wuerttemberg.
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 from entering the country.
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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 eastern state Saxony-Anhalt served as a key test ahead of general elections in 2017.
Merkel, who is expected to give her first reactions to the polls at around midday on Monday, has so far resolutely refused to impose a cap on refugee arrivals, insisting instead on common European action that includes distributing asylum seekers among the EU's 28 member states.
But Sunday's results could strengthen the hand of her adversaries, including strident critics within her Bavarian allies, the CSU.
"The only logical consequence of the result is a significant correction in the refugee policy," said Hans Michelbach, the vice-chair of the CSU's faction in the lower house of parliament.
The CSU, whose region is the main gateway to Germany for tens of thousands of refugees, has for months noisily criticised Merkel's policy.
Bild daily called the regional polls "a day of horror for Chancellor Merkel," while Spiegel Online described it as "Black Sunday for the CDU".
"For a long time she had hoped that despite all the opposition to her refugee policy, to grab the two state premierships in the southwestern states. That's not happening," said Spiegel in an editorial.
"Merkel will now have to live with the accusation that she has allowed the AfD to establish itself to the right of the CDU."
For most of the last decade, Merkel has enjoyed stellar popularity ratings as she pushed a middle-ground politics.
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