Depending on what parties end up in parliament, Merkel could also find herself leading a "grand coalition" government with the left-leaning Social Democrats.
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"This is a super result," Merkel told cheering supporters. "Together, we will do all we can to make the next four years successful ones for Germany." Merkel was interrupted by cheers and chants of "Angie! Angie! Angie!" as she made a brief appearance at her party's headquarters.
Merkel's conservative Union bloc won about 42% of the vote, an improvement of more than eight points over Germany's last election in 2009, according to ARD and ZDF television projections based on exit polls and early counting. Her coalition partners of the past four years, the pro-business Free Democrats, were just below the 5% level needed to claim seats in the lower house, according to the projections.
Nevertheless, the Union's strong showing was a personal victory for Merkel, solidifying her position as Europe's strongest political leader.
Center-left challenger Peer Steinbrueck's Social Democrats trailed well behind Merkel's party with up to 26.5%, projections showed. Their Green allies polled 8 %, while the hard-line Left Party – heirs of the former Communist East German rulers with whom the center-left parties have said they won't form an alliance –scored 8.5%.
"We did not achieve the result we wanted," Steinbrueck told supporters. He said that he wouldn't engage in "speculation" about the next government.
If Merkel's current coalition lacks a majority and the conservatives can't govern alone, the likeliest outcome is a Merkel-led alliance with the Social Democrats. The two are traditional rivals, but governed Germany together in Merkel's first term after an inconclusive 2005 election.
"The ball is in Merkel's court," Steinbrueck said. "She has to get herself a majority."
It wasn't clear whether a new party that calls for an "orderly breakup" of the eurozone, Alternative for Germany, would win seats in parliament's lower house. The exit polls showed them winning up to 4.9% – just shy of enough for seats. Merkel and others have said they won't deal with the party.
Labor Minister Ursula von der Leyen, a conservative, said it was an "overwhelming" result for Merkel's party.
"The important thing is that Germany has stable conditions," she said.
The exit polls were greeted by shocked silence at the Free Democrats' election event. Four years ago, the party won nearly 15% of the vote – but the party has taken much of the blame for squabbling in Merkel's governing coalition since then.
"It's the bitterest, saddest hour of the Free Democratic Party," the party's leader, Vice Chancellor Philipp Roesler, said.
Merkel's party ran a campaign centered squarely on Merkel's personal popularity. Recent polls gave her popularity ratings of up to 70%, but the sky-high ratings didn't extend to her coalition.
Merkel calls her current coalition "the most successful government since reunification" 23 years ago. She points to the robust economy and unemployment which, at 6.8%, is very low for Germany and far below that of many other European countries.
French President Francois Hollande congratulated Chancellor Angela Merkel on her victory in Sunday's German election, inviting her to talks in Paris once her new government is formed, the French presidency said in a statement.
Hollande and Merkel had a conversation in which they expressed their wish to "pursue their close cooperation in order to take up the new challenges of Europe's construction", the statement said.
European Council President Herman Van Rompuy, who chairs EU summits, said in a message of congratulation to Merkel: "I am confident that Germany and its new government will continue its commitment and contribution to the construction of a peaceful and prosperous Europe at the service of all its citizens."
AP and Reuters contributed to this report
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