BERLIN: German Chancellor Angela Merkel on Monday called a knife-edge defeat in a state poll "painful" and said her party had work to do to shore up support ahead of the September general election.

Merkel's ruling centre-right camp lost its decade-long hold on the northeastern state of Lower Saxony by just one seat to the opposition Social Democrats and Greens on Sunday in one of the tightest races in recent memory.

"Of course when you have been on such an emotional rollercoaster then a defeat is that much more painful," she told reporters after huddling with her Christian Democratic Union (CDU).

"We have got to ensure that we in future election campaigns get the necessary majorities together."

The stunning upset left her junior coalition partners, the pro-business Free Democrats (FDP), reeling after months of anaemic poll numbers and sniping at their luckless leader, Economy Minister Philipp Roesler.

Roesler, who is also Merkel's vice chancellor, offered Monday to step down after nearly two years at the helm of the FDP but the party declined.

However he will not carry the FDP's banner into the national election in eight months' time, leaving the job to his chief rival, parliamentary group leader Rainer Bruederle.

After a suspense-packed race with broad implications for the general election, the centre-left said it aimed to use its victory to create fresh momentum for its bid to deprive Merkel of a third four-year term.

"It shows the race until September is far from over," said Peer Steinbrueck, the Social Democrats' embattled challenger to Merkel.

Merkel, who campaigned hard for state premier David McAllister, a half-Scot seen as a potential successor as chancellor, enjoys a strong lead in national opinion polls due to her fierce defence of German interests in the eurozone crisis.

But pundits said the state win could help turn around the battered campaign of the gaffe-prone Steinbrueck.

The website of news weekly Der Spiegel described the result as a "nightmare" for the chancellor.

"It could not have been worse for Merkel and the CDU," it wrote. "The message for the national election is clear: the fight for the chancellery will be much more brutal than Merkel imagined."

The FDP managed to capture nearly 10 percent in the state election -- more than doubling many pollsters' forecasts and garnering their best result in Lower Saxony in post-war history.

But their success came at their allies' expense. The CDU scored just 36 percent, with voters splitting their ballots under Germany's two-vote system in a bid to rescue the state coalition by helping the weak FDP.

Around 101,000 voters who backed the conservatives in 2008 plumped for the FDP this time, exit polls showed.

"The black-yellow camp is not growing," Der Spiegel wrote, referring to Merkel's alliance. "It is cannibalising itself."

Roesler, who was born in Vietnam and raised by German adoptive parents in Lower Saxony, had been under fire for months due to dismal poll ratings and a failure to sharpen the FDP's profile against Merkel's conservatives.

The daily Sueddeutsche Zeitung said the election granted both the flailing FDP and the ailing Social Democrats a possible new lease of life.

"The FDP now has time to recover, to sort itself out," it wrote. "The SPD has the same task ahead."

Meanwhile Merkel was full of praise for the defeated McAllister, sparking speculation she might whisk him to Berlin for a senior party post and groom him for higher office.

After Lower Saxony, only the southern state of Bavaria is expected to vote before the general election.