Time is pressing for Europe's ailing largest economy, with Germans divided over migration, its security caught between a confrontational US and an assertive Russia and China, and businesses demanding help to remain globally competitive.
Merz's conservative bloc wants to ally with Olaf Scholz's Social Democrats (SPD), who came in third, after the nationalist populist Alternative for Germany (AfD) surged to second place.
But Merz's bid for an alliance with the SPD comes after a bruising campaign that highlighted deep policy divisions, in particular over migration.
The SPD, smarting from its worst post-war result, may set a high price for any deal.
The AfD and the radical Left Party jointly secured one third of seats in the new parliament, enough to block constitutional changes needed to loosen state borrowing limits - changes that some economists say are crucial to revive the flagging economy.
Merz said on Monday he was in talks with other parties to reform the debt brake that restricts borrowing.
He would also sound out allies about creating another special off-budget fund to raise defence spending.
Hitherto known as an Atlanticist, Merz again questioned the reliability of the United States as an ally, following similar comments on Sunday evening.
"And what we also see with the greatest concern, of course, is the attempt (by US President Donald Trump) to make a deal with Russia on Ukraine over the heads of the Europeans, over the heads of Ukraine," he told reporters.
"It will come as no surprise to you when I say that this is unacceptable both for Ukraine and for Europe," Merz said, adding it would be difficult if those who put "America First" actually made their motto "America Alone".
Europeans must now act together swiftly to organise their own defence capability and not just rely on the US, he said.
"... This really is five minutes to midnight for Europe."
On Sunday Merz had criticised what he called "outrageous" comments from the US during the election campaign, comparing them to hostile interventions from Russia.
He also warned the US not to create divisions by offering preferential tariffs to some European Union members.
Merz's conservative CDU/CSU bloc took first place in Sunday's election with 28.5 per cent - their second worst result of the postwar era - while the AfD won 20.8 per cent, its best ever result, according to provisional results.
Mainstream parties, however, rule out working with the AfD, an anti-immigration party which is monitored by German security services on suspicion of extremism but has been endorsed by US figures including billionaire Elon Musk.
A resurgent Left party and the AfD may wield a blocking minority in parliament that could stymie any increase in military spending.
The Left said on Monday it wants more borrowing but its support will hinge on the cash not being used for rearmament.
Both the AfD and the Left oppose military aid to Ukraine.
"Friedrich Merz must brace himself now," Left co-leader Jan van Aken said, warning that his party would fight every attempt to reduce welfare spending.
One spanner in the works could be a challenge to the election result by the populist BSW, a leftist splinter party led by Sahra Wagenknecht which narrowly missed the 5 per cent vote threshold to enter parliament.
That would leave Merz needing a third party - likely the Greens - to form a government.
Merz, who has no previous experience in office, aims to have a government by Easter, although the SPD warned its support was not a given.
In the election campaign, Merz promised a radical crackdown on immigration, saying he would not compromise on the issue.
He drew sharp SPD criticism for pushing a parliamentary resolution on migration last month that was supported in parliament by the AfD.
The move was seen by critics as an unforgivable breach of a political quarantine to keep the AfD out of power.
SPD politicians said they could no longer trust Merz as a result.
Analysts say the pressure is on for the next coalition to come together quickly to hold its own against the Trump administration, and to fend off the AfD by showing that mainstream parties can address voters' concerns.
If it does not, then the 12-year-old AfD, which is set to be the largest opposition party in the Bundestag, could be a frontrunner for the next elections set for 2029.
