Merkel's Christian Democratic Union (CDU) and its Bavarian sister party together won 41.5 percent of the vote -- against 25.7 percent for the centre-left Social Democrats (SPD) and 8.4 percent for the SPD's preferred allies the ecologist Greens.
The CDU's junior coalition allies the pro-business Free Democrats (FDP) for the first time in over half a century missed out on any seats in parliament, garnering only 4.8 percent, meaning Merkel's party will have to look for new partners to govern with.
The far-left Linke scored 8.6 percent, but the party, which succeeded East Germany's communists, is not seen as a potential coalition partner by the other left of centre parties.
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The eurosceptic AfD, founded earlier this year, won 4.7 percent of the vote, falling just short, like the FDP, of a five-percent hurdle to enter the Bundestag or lower house of parliament.
The Internet freedom party the Pirates, which first made a splash two years ago, also disappointed its followers, with 2.2 percent.
And the far-right National Democratic Party of Germany (NPD) missed out on seats with 1.3 percent while another xenophobic fringe group won just 0.2 percent.
Pilloried in nations at the centre of the eurozone debt crisis, 59-year-old Merkel is at the peak of her power as she heads into a third term as head of Europe's biggest economy.
In addition to overseeing a rebound in Germany's economy, Merkel has won praise from German voters for what they see as her deft handling of the financial crisis, with Sunday's result placing her party within reach of an absolute majority for the first time in about five decades.
But her triumph came at a cost for her current coalition partner, the pro-business Free Democrat Party (FDP), which suffered a major political debacle with a 9.9-percentage-point swing.
That outcome is likely to result in the party being bundled out of parliament for the first time in its 65-year history.
The likely end of Merkel's current CDU-FDP coalition had sparked speculation about the shape of her new government. Sunday's results indicate Merkel will turn to the opposition Social Democrats (SDP) to form a new grand coalition.
But Merkel refused to be drawn on her plans for a new government following the collapse of the FDP, which has already crashed out of eight state parliaments since it joined Merkel's coalition in 2009.
Speaking in a televised panel discussion, Merkel said she expected to be negotiating with the SPD to forge a new coalition government to rule Germany.
She also said it was "obvious" she would not attempt to rule with a minority government.
