With the eurozone crisis looming large, Merkel's Christian Democrats fell to 23.3% from 28.8% in 2006, according to a TV projection. It was the CDU's worst-ever showing in the sparsely populated state on the Baltic shore.
"We're disappointed that the CDU lost so much support," said Peter Altmaier, a senior CDU lawmaker in Berlin and close ally of Merkel. Altmaier said the CDU was in a difficult spot nationally due in part to the eurozone sovereign debt crisis.
The Free Democrats (FDP) were only an opposition party in the Mecklenburg-Vorpommern assembly but crashed out with a result below the 5% threshold – just 2.8%, from 9.6% in 2006. The result may raise pressure on the FDP to dump unpopular Foreign Minister Guido Westerwelle.
"There's no reason to throw in the towel now even though this defeat has a bitter taste," said FDP deputy party leader Christian Lindner, trying to douse speculation about Westerwelle. "No-one should write off the FDP. We're going to fight."
Worries about the prolonged eurozone crisis cast a shadow over the campaign ahead of a crucial vote in the Berlin parliament on eurozone bailout reforms in late September.
It has been a difficult year for Merkel. Two years ahead of the next scheduled federal election, the CDU is also slumping in national polls – in part due to general discontent over Merkel and over her hesitant leadership during the euro zone crisis.
"We've have proven ourselves to be reliable and solid," said the election's big winner, state premier Erwin Sellering of the centre-left Social Democrats (SPD) – who are the main opposition party in Berlin even though they ruled with the CDU in Mecklenburg-Vorpommern since 2006.
"And everyone who looks at the CDU-FDP government down in Berlin can see that they are neither reliable nor solid," he added. The SPD vote rose to 36.8% from 30.2%.
Far-right NPD wins seats
The SPD could continue the coalition with the CDU or switch to the Left, which won 18.2%, or the Greens, which won seats in the state for the first time ever with 8.2%.
Sellering would not say if he would pick the CDU as his coalition partner or the Left party or even the Greens.
The CDU and FDP have suffered a string of bitter setbacks in six state elections this year. The CDU lost control of two states – Hamburg and Baden-Wuerttemberg – it had long ruled.
The far-right NPD also appeared to have won seats in the state assembly again with 5.9%, just clearing the 5% hurdle, after they won 7.3% in 2006.
"There was an incredible smear campaign against us," NPD leader Udo Pastoers said in an ARD TV interview.
The poor results in Mecklenburg-Vorpommern were a personal setback for Merkel, who campaigned heavily in the state of 1.6 million with nine appearances. Merkel's constituency is also located in Mecklenburg-Vorpommern.
Yet another election defeat for the CDU will likely raise nervousness among backbenchers in the Berlin parliament worried about their job security. Merkel's coalition faces a difficult vote on the euro zone bailout on 29 September and there are already fears that not enough coalition deputies will back Merkel.
The Greens, riding high in the wake of the Japanese nuclear disaster, cleared the 5% hurdle in the state for the first time and now have seats in all 16 states – also a first.
"Merkel is going to need to have some long and hard thinking about yet another regional election loss," said Cem Özdemir, a Greens party leader in Berlin. He added that even though it was only a state election, "there is a clear message for Berlin".
EurActiv with Reuters