A split over immigration between Angela Merkel's Christian Democratic Union (CDU) and its sister Christian Social Union (CSU) party is threatening to end her 12-year spell as Germany's leader.
Germany's grand coalition government was formed in March after five months of political deadlock since an election the previous September. It resulted in Merkel's fourth term as German chancellor.
That vote saw a big upswing in support for the right-wing Alternative for Germany (AfD) party, who campaigned against Merkel's open-door policy to refugees and migrants arriving from the Middle East and Africa.
Now the CSU, fearful of losing further support from its conservative base, is threatening to withdraw from the country's grand coalition unless Merkel hardens her immigration stance.
"My sources in Berlin say the situation is on a knife-edge right now, some are even giving it an 80 percent probability that Merkel will step down in the next two weeks," said Nina Schick, director at political consultancy Rasmussen Global, in a telephone call to CNBC Friday.
Schick, however, warned that writing Merkel off has long been a dangerous game.
"The fundamental rule in German politics since 2006 is don't underestimate Merkel," she added.
The CSU party, chaired by Interior Minister Horst Seehofer, has long been a staunch ally of the center-right CDU party of Merkel. However, the CSU has its base in Bavaria, a conservative area in southern Germany that experienced the bulk of migrants entering the country in 2015.
The CSU has said it now wants the border sealed to migrants and those who attempt to enter Germany should be returned to the European country where they were first registered.
On Thursday, Merkel proposed a "coalition of the willing" alternative where countries such as Italy and Greece on the Mediterranean front line would agree on a deal with countries who are willing to house and care for a percentage of arriving migrants.
Now various reports in German media suggest that the CSU, unhappy with Merkel's plan, will end its long-held support for the CDU, a move that would plunge German politics into chaos.
But according to Schick, the threat could just be a strategy to prevent the CSU losing votes to the right-wing AfD party in October's regional election in Bavaria.
"Is it just posturing to the max to make themselves look like strict defenders of the border ahead of the local election? Or is this something they would really be willing to topple Merkel over?" she said.
The European analyst said that even if the CSU did leave the coalition, it remained unclear what the impact would be as constitutionally you would then need someone to win a majority confidence vote in Parliament.
Schick said who that person would be was not immediately obvious and any return to national elections risks giving the AfD an opportunity to gain more votes.
Euro swings on hoax
Meanwhile, a German broadcaster said Friday that Seehofer had already announced the end of the CDU-CSU alliance, which caused the euro to fall and German shares to sell-off.
The original report was sourced back to a tweet from a satirical magazine and within minutes was decried as a hoax. A senior CSU lawmaker also called the report "rubbish" and both the euro and German shares quickly recovered their losses.