The German leader has also ruled out standing for a senior position within the EU with speculation growing she wants to quit politics completely.
A party spokesman revealed Mrs Merkel will step aside from leading the country in 2021, in the wake of a disastrous regional election in Hesse.
Angela Merkel’s party, the Christian Democratic Union, suffered a 10 percent slump in the polls yesterday, to win just 28 percent of the vote in the central German state elections.
CDU sources said Mrs Merkel has told her party she will not stand as a candidate for Chancellor or MP after 2021.
ANGELA MERKEL QUITS: LIVE UPDATES
Earlier today she announced she would not stand for re-election as leader of the CDU during the selection process in December.
During a CDU leadership meeting this morning, Mrs Merkel said she wanted to remain Chancellor until 2021.
However political commentators have said this could leave her sitting as a lame duck, especially given Mrs Merkel’s previous comments that she believes the two positions should be linked.
Mrs Merkel has been leader of the CDU since 2000, and Chancellor for 13 years, a period which has seen her dominate EU and world politics..
She has also ruled out running for a senior position in the European Union after the European parliament elections next year, members of her Christian Democrats (CDU) conservative party said.
The move has led many to speculate she wants to quit politics altogether.
Friedrich Merz, a former parliamentary group leader of the CDU, has already through his hat into the ring to replace Mrs Merkel.
Mr Merz was parliamentary leader of the CDU/CSU alliance 2000-2002 and was also a member of the European Parliament. He now serves as chairman of BlackRock Germany.
Mrs Merkel has suffered a series of regional election setbacks which have undermined her authority and last weekend’s results from the western state of Hesse was the final blow which left her with no choice but to quit.
It is thought continued open door policies to Germany for migrants fleeing the Middle East crisis was largely to blame for her party’s disastrous polls.
Carsten Nickel, managing director at political consultancy firm Teneo, said: “We are witnessing a continuation of the pattern in place ever since Merkel’s mistakes in the 2015 migration crisis: the gradual but steady erosion of her political power.
“Rather than outright instability in Germany and Europe, it simply means a continuation of the current leadership vacuum.”
However the news that she was stepping down completely still came as a shock to CDU officials who thought the election results were not as bad as feared.
While Mr Merz is ready to put his name forward for CDU leader, Mrs Merkel’s rumoured preferred successor is the party’s secretary general Annegret Kramp-Karrenbauer who has already announced her intention to stand.
German health minister Jens Spahn has also announced his candidacy to replace Mrs Merkel, according to Reuters.
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