Monday's news came as a surprise to CDU party officials, who had expected Merkel to seek re-election as chairwoman at a party congress in Hamburg in early December.
BERLIN-Germany's governing parties lost significant support in a state election Sunday that was marked by discontent with infighting in Chancellor Angela Merkel's national government and prompted calls for her administration to get its act together quickly.
The election campaign in prosperous Hesse, which includes Germany's financial centre of Frankfurt, has been largely overshadowed by the woes of a federal coalition in office only since March.
Taxi for Angela Merkel? "With these latest results, it has simply become untenable that Merkel continues to lead the CDU", said Mujtaba Rahman, managing director at Eurasia Group, a consultancy.
During that momentous upheaval, Merkel, who holds a doctorate in quantum chemistry and was working in a lab, joined a pro-democracy group that would merge with the Christian Democrats of chancellor Helmut Kohl.
She allowed large numbers of asylum-seekers into Germany in 2015, many fleeing the fighting in Syria, declaring that "we will manage it", before gradually pivoting to a more restrictive approach.
The CDU's coalition partners in Berlin, the Social Democrats (SPD), were also punished at the regional ballot, coming equal-second with the Greens, at 19.8%. She had won four consecutive terms.
SPD leader Andrea Maria Nahles announced that she would discuss a roadmap to measure the progress of the coalition with the SPD's secretary general, Yasmin Fahimi on Monday. If Merkel wanted to win a fifth term as chancellor after 2021, she would have to re-establish her party as dominant under her leadership.
Merkel has been CDU chairwoman since 2000 and giving up the role would start a race within the party to succeed her as chancellor.
Her Catholic, western German background contrasts with Ms Merkel's Protestant, eastern roots.
In Hesse, where Merkel's CDU rule with the ecologist Greens, the two biggest winners were the Greens and the far-right Alternative for Germany.
News agency dpa cited unidentified party sources as saying Merkel told an ongoing CDU leadership meeting that she's prepared to step down as party leader but intends to remain chancellor.
Her proposal did little to appease the head of the SPD's youth wing, who said the election in Hesse was a clear signal that the ruling coalition was not viable.
Elected state premier of Germany's most populous region North Rhine-Westphalia just last year, 57-year-old Armin Laschet could emerge as the compromise candidate to heal divisions that have torn at the CDU under Merkel.
The announcement is a sign of Merkel's weakened power within her own party, and waning popularity in the country.