Bavarian conservative leader Horst Seehofer had threatened to resign his position as leader of his party and German Interior Minister if Dr Merkel failed to strike a bargain to control immigration to Germany - either multilaterally within Europe, or unilaterally at home.
The compromise deal meant that Seehofer was able to hail tighter immigration controls, while Merkel was able to say that Germany adhered to European Union rules and upheld freedom of movement within the bloc.
Merkel says a plan to regulate immigration that European Union leaders approved Friday and bilateral agreements in principle that she hashed out with some countries for them to take back migrants would accomplish what Seehofer seeks.
While both parties sought to de-escalate the crisis, Seehofer remained defiant until the last moment, pointing to his leadership of a party that had proved its ballot-box muscle in the past.
In comments to the Sueddeutsche Zeitung newspaper ahead of Monday's renewed talks with Merkel, Seehofer complained he was in an "inconceivable" situation.
CSU hardliner Alexander Dobrindt said the problems were "solvable" and reminded lawmakers of the value of their alliance. "In the end, the government could fall and an old, proud party could descend into ridiculousness".
The centre-left Social Democrats, another partner in the coalition, must also accept the deal along with neighbouring Austria.
Merkel's 2015 decision to keep borders open to migrants and refugees arriving from the Middle East via the Balkans, Hungary and Austria scrambled the traditional alliances of German politics.
Merkel, who has been Germany's chancellor since 2005, has often thwarted her opponents by assuming their positions, but on migration she can not do that to the same extent.
Earlier, Merkel opposed Seehofer's proposals and argued that unilateral moves would have "a domino effect", prompting other European Union member states to push back refugees.
A hardline stance on immigration and criticism of Merkel's decision to welcome almost a million migrants in 2015 have been part of the CSU's political strategy ahead of regional elections in the fall.
He told colleagues on Sunday he saw no alternative to turning migrants back at the border despite Merkel's efforts in Brussels last week and that discussions with the chancellor had been fruitless, according to a party source.
Merkel and Seehofer had long battled over the right approach to migration, but seemed to reach an agreement after federal elections last year when the chancellor agreed to try to limit the number of refugees arriving in Germany each year to 200,000 - a policy that Seehofer had repeatedly demanded and Merkel had consistently rejected.
The issue of direct rejection was the biggest one in the asylum conflict of the sister parties CDU and CSU.
Ms Merkel's CDU relies on the CSU to maintain power through a coalition. She expressed the wish to continue working together with the CSU but did not refer specifically to Seehofer.
Bavaria's CSU Prime Minister Markus Söder said "we're ready for compromises" and "for us now there is no exit from the government".
Overall, polls also suggest that the Bavarian CSU is losing rather than gaining electoral influence due to its "uncompromising" position.