Merkel's centre-right coalition suffered a further setback when their junior coalition partners at the national level, the Free Democrats (FDP), failed to clear the five percent threshold needed to win seats -- for the fifth time this year.
The beleaguered FDP, which had attempted to attract voters in Berlin with its increasingly euro-sceptic tactics, plunged to 1.8% from 7.6% in 2006, preliminary results showed.
Their eroding support nationwide could destabilise Merkel's centre-right coalition, analysts said.
Merkel, under fire for her hesitant leadership in the eurozone crisis, is halfway through a four-year term. But election setbacks for her CDU have hurt her standing before the vote on eurozone measures in parliament on 29 September.
"We would be wise to show humility about this result," said a visibly stunned FDP deputy party leader, Christian Lindner. "It's a low-point but also a wake up call. We knew it was going to be a difficult year and that's been dramatically confirmed."
The SPD won 28.2% of the vote in Berlin, down from 30.8% in 2006 in Germany's largest city with 3.4 million inhabitants, according to an exit poll on ARD television.
SPD Mayor Klaus Wowereit appeared to be headed for a third five-year term, with the Greens as his most likely coalition partner.
"The best part of the result tonight is that the voters showed the FDP they won't get anywhere with populist attacks against Europe," said SPD leader Sigmar Gabriel, celebrating his centre-left party's sixth win in seven regional votes this year.
"It shows the voters are smarter than the FDP campaign strategists and that you can't win an election by campaigning against Europe. The FDP tried that and failed."
Eurosceptic message fails
The CDU won 23.3%, up slightly from 21.3% in 2006 but well below the 40% the party used to win in Berlin in the 1980s and 1990s. The Greens won 17.6%, up from 13.1% in 2006, and the Left party fell to 11.7% from 13.4%.
The SPD and Greens have pledged support for boosting the eurozone bailout fund for countries like Greece in a crucial vote in parliament on 29 September, when Merkel may face a revolt from more eurosceptic members of her coalition.
The Pirate Party, running on a campaign for reform of copyright and better privacy in the Internet age, came out of nowhere to win a stunning 9.0%.
The SPD, in opposition at the national level since 2009, hopes their re-election in Berlin will help build up momentum to oust Merkel in the next federal election in 2013 -- or possibly sooner, if her government were to collapse.
"We're not the successors to the FDP," said Gabriel, when asked if the SPD would be ready to replace the FDP if the government were to fail before 2013.
The SPD has ousted or helped defeat the CDU in Hamburg and Baden-Wuerttemberg this year and remained in power elsewhere.
EurActiv with Reuters
COMMENTS
You can't argue with the markets, thank God, no, they alone will bring bring this IV Reich down.
"populist attacks" - The new Fuhrer's (Schultz) term "Populism" is what they use for the actual term democracy - i.e. giving people what they want.
We'll see how enthusiastic the pro-IV Reich (EU) league are when the Euro is uncompetitive in a norther alliance, we'll see how that plays with exports.
This is the beginning of the end for German exports, I hope you enjoyed it.
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