Mr Merz's conservative Christian Democrats and their Bavarian sister party the Christian Social Union, which won with 28.5% of the votes, and the Social Democrats have a combined 328 seats in the 630-seat parliament.
With US President Donald Trump back in the White House and tensions rising over how to resolve the war in Ukraine, Mr Merz wants to unify Europe in the face of challenges from the US and Russia.
Mr Merz's task will be complicated by the need to form a coalition with the centre-left Social Democrats of outgoing chancellor Olaf Scholz, who will remain in office for the immediate future.
Friedrich Merz, who is set to become the new German chancellor, has vowed to "create unity" in Europe as it adjusts to the new Trump administration and Russia's war on Ukraine.
Co-leader of the Social Democrats, Lars Klingbeil, indicated a deal with Mr Merz is not a formality.
