Merkel pledged to work harder to address people's concerns, particularly on migrants. Her Christian Democratic Union party, or CDU, received just 17.6 per cent of the vote in the German capital.
"That's very bitter," Merkel told reporters in Berlin, referring to the drop of almost 6 percentage points her party suffered.
The result means that Berlin state's current coalition government, in which the CDU is the junior partner to the center-left Social Democrats, or SPD, has no majority going forward. A three-way coalition of Social Democrats, the Green Party and the Left Party is now likely in the capital.
The left-leaning coalition that could now take over office would likely be more welcoming of refugees than the current state government.
Both CDU and SPD which saw its share of the vote drop 6.7 points to 21.6 per cent lost voters to the nationalist Alternative for Germany, which has campaigned heavily against immigration.
The party, known as AfD, entered its 10th state parliament yesterday with 14.2 per cent of the vote. The nationalists' strong result is particularly remarkable because the city of 3.5 million is usually known for its liberal attitude.
Speaking in unusually self-critical terms, Merkel edged away from her oft-repeated mantra first uttered during the height of the migrants crisis last year that "we will manage."
Merkel said that while she stands by the sentiment, some voters had taken it as a provocation in view of the massive challenge that the country faces integrating hundreds of thousands of migrants.
Merkel added that she's prepared to address voters' concerns about the unprecedented influx of migrants over the past year, but that if people simply don't want Muslim asylum-seekers because of their religion, then that would be counter to her Christian Democratic Party's basic principles, as well as Germany's.
He noted that last fall up to 1,000 refugees were arriving in the capital each day, while that figure is down to between 25 and 30 now.
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