She will also have to contend with pressure from her Social Democrat (SPD) junior coalition partners, who have also bled support in Hesse and are under pressure to rethink their alliance with Ms Merkel.
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.
Germany's Angela Merkel will not run for re-election as leader of her centre-right CDU, sources said Monday, in the clearest sign yet that the veteran chancellor is preparing her eventual exit after voters again punished her fragile coalition in a regional poll.
"Today it is time to begin a new chapter", she told reporters at her party headquarters.
The CDU remained the largest party, but lost around 10 percentage points to score 28 percent of the vote, public broadcaster ARD reported, while junior federal government partners the Social Democrats (SPD) shed nearly 11 points to land on just 20 percent.
Born in Hamburg in July 1954, Angela Merkel began her political career by joining the communist leaning youth movement Free German Youth.
The protest party has eaten into both the CDU and SPD vote by railing against migrants and refugees as well as uncaring Berlin elites.
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Germany's other leader CDU chancellors - Konrad Adenauer and Helmut Kohl - both had messy ends to their time in office.
Merkel has been in a hard position since September 2017, when a national election left her party without an overall majority.
That's a major concession for Merkel, who for years has insisted that the chancellor should also be party leader.
His CDU colleague Christian von Steffen was more blunt: 'We need a meaningful programme with a clear path and new faces'.
In Hesse, where Ms Merkel's CDU rule with the ecologist Greens, the two biggest winners were the Greens and the far-right Alternative for Germany.
The unstable government nearly collapsed twice over the summer, notably when Merkel restrained hardline Interior Minister Horst Seehofer's attempts to toughen up migrant policy. That's two-thirds of the party's 2013 result and its worst showing since 1946. Crucially, they raise her chance of getting re-elected as party leader at the CDU's convention in December.
Merkel confirmed her plans at a press conference in Berlin on Monday.
Volker Bouffier, lead candidate for the German Christian Democrats (CDU), fills in his ballot paper in Hesse state elections on October 28, 2018 in Giessen, Germany.