Merkel's Christian Democrats (CDU) and their long-time Bavarian Christian Social Union (CSU) allies agreed on Monday to set up special transit zones at the border with Austria where migrants already registered in other EU countries will be held and then sent back to the countries where they had registered first.
"After intensive discussions between the CDU and CSU we have reached an agreement on how we can in future prevent illegal immigration on the border between Germany and Austria", Seehofer said as he left the CDU's Berlin headquarters.
The coalition parties, comprising Merkel's Christian Democrats (CDU), the CSU and Social Democrats (SPD), are holding a series of meetings on Monday to decide what action to take.
The deal also faces a potential challenge from the European Union.
While Seehofer's comparatively strong stance has caused this clash with Merkel, the Bavarian leader remains a centre-right figure fundamentally unopposed to mass migration, and the new compromise will do nothing to undo the effects of decades of mass migration to Germany - most dramatically those million-plus arrivals who walked through Europe during the migrant crisis.
Thomas Kleine-Brockhoff, director of the Berlin office of the German Marshall Fund, said Merkel's political capital is depleted.
"In this case, the CSU, Seehofer's party, would quit the coalition government", he continues.
This week, she has agreed to build border camps for asylum seekers and to tighten the border with Austria.
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Last November, when Merkel was negotiating her fourth coalition, the long-time chancellor told German broadcaster ZDF she was "very sceptical" about leading a minority government and would rather call new elections.
As the CDU and CSU parties hunkered down in Berlin and Munich, leaders on both sides sought to clarify what was a stake.
Before the refugee crisis of 2015, Seehofer was mainly concerned with regional pet projects tolerated by Merkel, such as rewarding mothers who raise young children at home with state benefits and charging foreign motorists for using Germany's Autobahn.
Merkel, who has been in office since 2005, warned last week the issue of migration could decide the very future of the European Union itself.
Knaus, director of the thinktank ESM, said the deal struck by the German government could have the unintended outcome of increasing migration into Germany, if for example the Greek government used the new agreement to unite families with people who had already arrived in Germany, while in return taking back some asylum seekers who have been finger-printed in Greece.
The chancellor's frantic last-minute diplomacy was ultimately prompted by the CSU's fear of losing its cherished absolute majority in Bavaria's state parliament.
"We will do the same thing and we'll come out ahead because there are more people arriving here".
Patzelt points out that what Merkel "sells as a threat to European integration" is considered by Seehofer and the CSU as a suitable means of stopping immigration to Germany and to Europe.