Some 6.1 million people are eligible to vote for a new state legislature in Lower Saxony, which occupies a swathe of northwestern Germany. It's been run for the past decade by a coalition of Merkel's conservative Christian Democrats and the pro-market Free Democrats, the same parties that form the national government.
The vote is a significant electoral test before national parliamentary elections in September, in which Merkel will seek a third four-year term. She and her party are riding high in polls, but the opposition hopes Lower Saxony will show she is vulnerable.
Pre-election polls in the state showed a neck-and-neck race between her coalition and the opposition Social Democrats and Greens, who have been struggling to gain traction nationally.
Much could depend on the performance of Merkel's allies, the Free Democrats, whose support has eroded badly since they joined her national government in 2009. They've failed to win major tax cuts that they once pledged and have taken much of the blame for frequent public bickering in the chancellor's coalition.
If the Free Democrats fail to win the 5 percent support needed to gain seats in the state legislature Sunday, that could help hand Lower Saxony to the opposition—and prompt the departure of embattled party leader Philipp Roesler, who is also vice chancellor.
The opposition leader in Lower Saxony, Stephan Weil, says a win would "fire up" his Social Democrats and would mean that a center-left German government "will be taken seriously as an option after the national election."
The incumbent state governor, popular Christian Democrat David McAllister, says that now "is not the time for any experiments."
Both nationally and in Lower Saxony, Merkel and her party have been bolstered by a relatively robust economy, low unemployment and the chancellor's hard-nosed handling of Europe's debt crisis—criticized in debt-burdened European countries but well-received among German taxpayers.
Merkel has also profited from stumbles by the Social Democrats' candidate for chancellor, Peer Steinbrueck, a former finance minister whose personal popularity lags far behind Merkel's.
Over recent weeks, Steinbrueck has drawn criticism for saying the chancellor earns too little—adding to controversy over his own high earnings from the public-speaking circuit.
That hasn't helped a campaign which promises to narrow the gap between Germany's haves and have-nots.