Chancellor Angela Merkel has pledged to win back voters' trust after a nationalist, anti-immigration party beat her conservatives in a state election in the region where she has her political base.
However, the German leader insisted that she is on the right course in how she is handling the migrant crisis.
Merkel's Christian Democrats finished third in Sunday's election for the state legislature in Mecklenburg-Western Pomerania, behind the three-year-old Alternative for Germany, or AfD. It was held a year to the day after she decided to let in migrants stuck in Hungary, triggering the peak of last year's influx.
The centre-left Social Democrats, Merkel's partners in Germany's national government, remained the strongest party in Mecklenburg.
The region is sparsely populated, but the vote was symbolically significant because Merkel has her parliamentary constituency there and it was the first of five regional ballots before a national election expected next September.
Merkel acknowledged that it was a bad start, saying she was "very unhappy" with her party's performance. She took responsibility for the outcome, acknowledging that national issues - particularly refugees and their integration -had dominated the campaign.
"I am the party leader, I am the chancellor - you can't separate those in people's eyes, so I am of course responsible too'' for the result," Merkel told reporters on the sidelines of the Group of 20 summit in China. "However, I believe the decisions that have been made were right, and now we must continue working.
"We have to take note of the fact that many people do not at present have sufficient confidence in our ability to resolve these issues,'' he said, "although we have achieved a great deal as far as reducing the number of refugees arriving is concerned, and with a view to preparing integration and supporting municipalities.''
Merkel said the party now has to "work intensively on winning back trust, and I am firmly convinced that we can only do that by simply showing that we are solving the problems.''
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