"My point of view is that new elections would be the better path," Merkel told ARD television in an interview to be broadcast later in the evening. She added that her plans did not include being chancellor in a minority government.
The pro-business Free Democrats (FDP) unexpectedly pulled out of more than four weeks of negotiations with Merkel's conservative bloc and the ecologist Greens, citing irreconcilable differences.
The euro hit a two-month low against the yen soon after FDP leader Christian Lindner said on Sunday that his party was withdrawing from the talks as the three would-be partners could not find common ground on key issues.
Merkel was weakened after a September election as voters angry with her decision in 2015 to open Germany's borders to more than a million asylum seekers punished her conservatives by voting for the Alternative for Germany (AfD) far-right party.
The break down of the talks leaves Germany with two unprecedented options in the post-World War Two era: Merkel forms a minority government, or the president calls a new election if no government is formed.
The center-left Social Democrats (SPD), Merkel's current coalition partners who were the second-biggest party in the election, have ruled out a repeat of an alliance with her conservatives, who won the vote but were left with fewer seats.
There is little appetite for a new election. The main parties fear that the AfD would win more than the almost 13 percent of votes it secured to enter parliament for the first time as the third-biggest party.