While Merkel insisted she would not step down, she also suggested that calling a new election would be preferable to leading a government that must survive vote-to-vote without a majority in the German Parliament, the Bundestag.
"Germany needs a stable government," she said.
Her comments indicated that without a change of heart from the centre-left Social Democrats, who have resisted joining a new coalition, Germany is probably headed for a new election.
The possibility was met with enthusiasm by the German far right and with apprehension across Europe, where German stability has long been taken for granted.
"After Brexit and Trump, Germans are now facing the prospect of something out of the ordinary happening in their own country," said Sudha David-Wilp, deputy director of the Berlin office of the German Marshall Fund. "Something that was beyond their borders is a spectacle that they will now have to deal with, too."
The breakdown of the talks ends the assumption that Europe's largest economy will be governed by a previously untried coalition among Merkel's conservatives, the pro-business Free Democrats and the environmentalist Greens.
That awkward alliance - dubbed the "Jamaica coalition" because the parties' colours are the same as the island nation's flag - was considered the only viable path to a stable government.
But after weeks of contentious negotiations over asylum, tax and environmental policies, the Free Democrats unexpectedly pulled out yesterday, leaving Merkel with few options - none of them attractive.
One is to form a minority government, perhaps with the Greens. But that has never been attempted at the federal level in Germany, and it could prolong the country's instability while hastening Merkel's exit.
Another is for Merkel to persuade her partners from the last government, the Social Democrats, to join her in another "grand coalition" between Germany's two biggest parties.
But the Social Democrats continued to resist that idea today. The party "will not shy away from new elections," Social Democratic leader Martin Schulz said. "In fact, we welcome them."
The possibility of an election early next year that could open the way to more gains for the far-right Alternative for Democracy Party (AfD) - and further unsettle the politics of a country that has been Europe's rock of stability - sent the euro sliding in early trading before it rebounded.
AfD leaders celebrated the breakdown in the talks.
"Merkel failed," tweeted prominent AfD lawmaker Beatrix von Storch. "An AfD success!"
At the least, a new vote would lead to months of uncertainty in German politics at a time when Europe has much on the line and other countries across the continent are looking to Berlin for leadership.
Among the outstanding issues are Britain's departure from the European Union. Britain is due to get out by March 2019, but instability in Berlin could make the negotiations - already fraught - even more difficult.
French President Emmanuel Macron, too, has a lot at stake in the German talks.
He has advocated sweeping reforms for the E.U. and the euro, including a "multispeed" Europe that would create a separate euro-zone budget and finance minister. But his initiatives rest on a strong Franco-German axis, a condition that was largely assumed as a given after Macron's election victory in May.
Macron told reporters that he called Merkel as her plans to form a governing coalition collapsed.
"It's not in our interests that the process freezes up," Macron said.
It is Merkel herself, however, who has the most to lose if the talks are not revived. After three terms in office, her fourth was expected to be the one that would cement her legacy. But now her ability to serve another four years is in jeopardy.
The major German daily Frankfurter Allgemeine Zeitung called the impasse "the most difficult crisis of her 12 years in office".
It comes after a September election in which Merkel's CDU - and its Bavarian sister party, the Christian Social Union - topped the polls, but fell well below expectations with 33 per cent of the vote.
The election left Merkel weakened, and with diminished leverage heading into coalition talks that were always expected to be difficult, but which most analysts had thought would ultimately yield a government.
Although the parties were considered far apart on key issues, most observers had predicted that they would put aside differences to avoid another election that could enhance support for the anti-immigrant AfD, which won parliamentary seats for the first time this year after gaining nearly 13 per cent of the vote.
But the parties' stances on asylum rules and German reliance on coal proved to be the sticking points.
The breakdown came when Free Democratic Party leader Christian Lindner announced that his party was pulling out of the talks, saying there was no "basis of trust".
"It is better not to govern than to govern wrongly," said Lindner, whose party won nearly 11 per cent in the September vote.
The Greens and the CDU accused the Free Democrats of political grandstanding.
Greens co-leader Katrin Göring-Eckardt, whose party won nearly 9 per cent in September, said the parties had been headed towards a deal when the FDP suddenly pulled out.
"I'm convinced it wouldn't have taken much more time to come to agreement," she said.
