Kramp-Karrenbauer's decision to give up her ambition of succeeding Merkel came after an eastern branch of the CDU defied the national party and voted with the far-right Alternative for Germany (AfD) to install a state premier from a third party.
Many analysts believe a cohabitation arrangement of party chair and chancellor would be more hard if Merz, an erstwhile rival of Merkel, captures the CDU leadership.
Left supporters are meanwhile outraged at also being placed beyond the CDU's "firewall", essentially as undesirable as a far right which most CDU leaders view as a political home for "Nazis" or "fascists".
"After careful consideration, I have made a decision to run again for the post of party chairman at this party congress", Merz told a news conference in Berlin.
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The ballot in Hamburg is the first one to take place since the CDU was thrown into chaos earlier this month when leader Annegret Kramp-Karrenbauer - seen as Merkel's likely successor to the Chancellery - resigned after CDU delegates in the Thuringia state defied her to cooperate with the AfD. "It is not a break with the past but a start and a renewal for the future". But, he said, those who want to pull apart society won't succeed, "because we are more and we will prevent that".
It was a "bitter day" for Merkel's Christian Democratic Union (CDU), party general secretary Paul Ziemiak said.
He added it was time to put past differences behind them and build bridges between the liberal and conservative wings of the party, which has governed Germany since 2005.
Merkel, chancellor for nearly 15 years, has said she will not run again in the next federal election, due by October 2021.
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It is unclear if she will be able to remain chancellor until then with a new party leader although Kramp-Karrenbauer has said the party expects the new party chair to work alongside the chancellor.
Laschet said Merkel's government, which governs in coalition with the Social Democrats (SPD), was elected until the end of the term in autumn 2021 and there would be no cabinet reshuffle now.
"That's certainly something that the lead candidate from the Greens party wanted to stress and it's something that she's been talking about since these exit polls emerged".
Weekly marches across the country by the school strike movement a year ago helped force Berlin to raise its climate ambitions and pass a law enforcing the end of coal power generation by 2038. A week after a racist attack in western Germany that left 11 people dead, he also said that Jews and people with migrant roots must not be afraid to live here.
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Former environment minister Norbert Roettgen, announced last week that he would seek the CDU leadership.