Voters in the small, northern state of Schleswig-Holstein on the Baltic Sea handed her CDU party 34 per cent, while the centre-left Social Democratic Party (SPD) clinched 27 per cent, according to public broadcaster ZDF.
Another public broadcaster ARD gave the CDU 33 percent and the SPD 26 per cent.
The results marked a blow for the Social Democrats who had earlier this year seen a surge in support since new leader Martin Schulz was chosen in February.
The blow to the Social Democrats' confidence came one week ahead of a far bigger regional vote in their stronghold of North Rhine-Westphalia, also Germany's most populous state.
SPD deputy chief Ralf Stegner called Sunday's result "disappointing" and a "bitter day for Social Democrats in Schleswig-Holstein".
Merkel's CDU meanwhile was confidently looking to next Sunday's polls.
"A good election result gives us motivation to go on fighting," said lawmaker Michael Grosse-Broemer, who heads the CDU parliamentary group in the Bundestag.
But with the pace of new arrivals sharply slowing, surveys show the conservatives gaining ground.
The populist AfD (Alternative for Germany), which has railed against the migrant influx, scrapped through on Sunday with 5.5 per cent support, winning its first seats in the state parliament in Kiel, despite a vicious falling-out between moderates and hardliners inside the party.
The result was however a far worse showing than at the end of last year, when it was the third most popular party nationwide.
Popular SPD state premier Torsten Albig, 53, has led a coalition of SPD, Greens, and local Danish minority party SSW since 2012.
His CDU challenger Daniel Guenther is 10 years younger and has been an energetic opposition leader at the regional parliament.
The centre-right group there has sparked debate across Germany in recent years with populist proposals like requiring pork to be served in school canteens -- a nod to voters fearful of Islam's influence on public life.
Another battleground is wind farm construction near residential areas -- no small matter in a windy coastal region whose turbines are a key element in Germany's "energy transition" away from nuclear and fossil fuels.
Both major parties have sent their heaviest hitters to Schleswig-Holstein in recent days, with Schulz making appearances in Kiel and Luebeck Thursday.
But his interventions have done little to counteract criticism that the former president of the European Parliament has so far failed to offer concrete attacks against Merkel and the right.
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