The long-serving leader of Europe’s most powerful country insisted she did not see any reason to quit her post.
But she said she would rather face another election than lead a minority government.
Some fear continuing uncertainty in Berlin will prolong delays in moving Brexit talks with Britain onto their next phase, because Berlin’s voice is seen so influential in Brussels decision-making.
Mrs Merkel has been trying to secure a governing pact since elections at the end of September produced a victory for her but no majority as many voters deserted the mainstream parties.
Her Christian Democratic Union and its sister party the Christian Social Union had been in talks with the liberal pro-business Free Democratic Party and the Greens.
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Their planned alliance was dubbed the “Jamaica” coalition because the parties’ colours mirror that country’s flag.
But the talks foundered on issues such as how many of the migrants who controversially entered Germany via the Balkans in 2015 and 2016 could rejoin their families.
Mrs Merkel’s popularity plummeted after she opened Germany’s borders to some 1.2 million migrants in 2015 alone.
The controversy saw the far-right anti-immigration Alternative fur Deutschland (AfD) party win seats in Parliament in September for the first time in more than 50 years.
Climate change was also a source of friction with the Greens’ demand for tougher carbon reduction targets viewed by their potential partners as a threat to energy and manufacturing.
On Sunday night the FDP pulled out of the talks, leading Mrs Merkel to blame them for collapsing a negotiation she said was on the “home straight”.
Mrs Merkel, who was first elected Chancellor in 2005 said she was ready to serve another four-years.
Indicating she would not bow to any pressure to step down, she said it was important to send a signal of stability.
She added that she was “very sceptical” about the prospects of running a minority government, adding: “New elections would be the better path”.
She insisted her conservative bloc would enter new elections more unified than before.
But analysts warned a new poll was likely to benefit the anti-Islam AfD most, so other parties would be reluctant to take the risk.
Some in Mrs Merkel’s party still hope for another “grand coalition” with the centre-left Social Democrats led by her rival Martin Schulz – despite that party repeatedly ruling out the idea.
Mrs Merkel said she would wait to see the result of talks between German President Frank-Walter Steinmeier and party leaders.
Mr Steinmeier would have to call any new elections and the process could take months, frustrating the hopes of other European leaders that they could by now be sure of Mrs Merkel’s political future.
The president indicated yesterday he saw new elections as a last resort and he urged the parties to compromise.
He argued: “Inside our country, but also outside, in particular in our European neighbourhood, there would be concern and a lack of understanding if politicians in the biggest and economically strongest country [in Europe] did not live up to their responsibilities.”