Senior conservative Jens Spahn appealed to parties to back Merz in the new vote on Tuesday afternoon, telling reporters: "The whole of Europe, perhaps the whole world, is watching this election.
"I appeal to everyone to be aware of this special responsibility."
Merz, 69, who led his CDU/CSU conservatives to a federal election victory in February and signed a coalition deal with the centre-left Social Democrats (SPD), won just 310 votes in the secret ballot in the lower house earlier on Tuesday, six short of an absolute majority.
It meant at least 18 coalition MPs had failed to back him to become Germany's 10th chancellor.
While not a fatal setback, Merz's failure to win parliamentary backing at the first time of asking is a first for postwar Germany and an embarrassment for a man who has promised to revive economic growth at a time of global turbulence.
Most immediately, it threw into doubt the trips Merz had planned to France and Poland on Wednesday as the new chancellor.
Nine MPs did not cast their ballot and three abstained while 307 voted against Merz, Bundestag president Julia Kloeckner said.
Merz, visibly shocked, rose to confer with colleagues.
Party insiders had on Monday expressed confidence that he would secure a majority.
Kloeckner adjourned the parliamentary session to allow the parties to decide how to proceed.
"This is a significant negative. He (Merz) is still likely to be elected but this shows that the coalition is not united, which could weaken his ability to pursue policies," said Holger Schmieding, chief economist at Berenberg in London.
After the election in February, Merz had secured framework legislation for a huge borrowing programme focused on defence and infrastructure.
Some of his own supporters were unhappy with the loosening of borrowing limits, however.
The Bundestag has 14 days to elect Merz or another chancellor.
Merz's conservatives won February's election with 29 per cent of the vote, leaving them in need of at least one partner to form a majority government.
On Monday, they signed a coalition deal with the SPD, who won just 16 per cent, vowing to reform Germany.
But both parties have lost support since their already dismal performances in February, with the far-right Alternative for Germany, which came in second, topping some recent surveys.
Germany has not had a majority government since the collapse of Olaf Scholz's SPD-led three-way coalition in November, and is already facing an array of headwinds.
A global trade war sparked by US President Donald Trump's sweeping import tariffs is threatening to cause a third year of recession in an economy that is having to rethink its business model.
Meanwhile, Trump has weakened the US commitment to the NATO defence alliance, prompting Europe to rush to boost defence spending to be able to take more of the burden.
with AP
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