Speaking at the news conference on Monday, Merz described the result in Mecklenburg-Vorpommern as "a heavy blow" for the centre-right CDU.
"This election is a profound turning point. It is a dramatic, unprecedented result for the CDU in Germany," he acknowledged.
Merz said there had been no discussion about his own position since the results and pushed back against the idea that his low popularity ratings alone were behind the election defeats.
"I know that I as an individual played a role in these state elections," Merz said, before adding: "But the reasons for the results go far beyond just me."
"We are witnessing a profound transformation of Germany's political party system, as is happening in many other countries around the world."
There have been rumours Merz, who has only been in power for 16 months, could be replaced mid-term in a so-called chancellor swap due to his poor approval ratings.
Asked earlier on Monday how long Merz has left in office, the AfD's co-leader Alice Weidel told the BBC: "Pretty soon, he's going to leave."
The two elections took place on Sunday, a fortnight after the CDU saw its vote halved in the state of Saxony-Anhalt, where the AfD won a major victory.
In Mecklenburg-Vorpommern, the CDU fell short of a 5% threshold to enter parliament, underperforming against what had already been projected to be the party's worst ever result in the area. Merz earlier conceded that this result was "a disaster".
While the AfD won the most votes in Mecklenburg-Vorpommern, it was far short of a majority and is unlikely to govern as other parties may refuse to work with it.
Some branches of the party are classed as right-wing extremist by domestic intelligence, a designation it strongly rejects.
But its anti-immigration, Germany first, and Russian-friendly agenda has found fertile ground in the country's former communist east.
In Berlin, the CDU's defeat means Die Linke, which won the most votes, could now take power in a coalition.
Elif Eralp, who led the party to victory in the capital, promised to tackle unaffordable rent prices in remarks made after the results came out.
"The people of Berlin have clearly opted for a change in policy, specifically for an affordable Berlin, for policies that solve the rent crisis and put people first," she told German news outlet The Pioneer.
During the election campaign, Eralp pledged to expropriate more than 200,000 housing units from private landlords. Merz has promised to pursue legislation to prevent such actions, citing the impact on foreign investment.
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