Seehofer offered to quit as interior minister and as leader of the Christian Social Union (CSU), the Bavarian sister party of Merkel's Christian Democrats (CDU), during a marathon party meeting Sunday, but was later persuaded by CSU colleagues to meet with Merkel one more time and attempt to resolve the row, Reuters reported.
It isn't clear yet what effect Seehofer's resignation might have.
"The Chinese authorities do not seem to have tried to stem the yuan's fall, which many people take as a message from Beijing that that's one thing they could do against US pressure on trade", said Bart Wakabayashi, Tokyo branch manager of State Street Bank.
The source of the impasse is a migration plan hatched by Seehofer to take unilateral action to turn back migrants who have been registered first in another European Union country.
Europe started with a thud too, with the pan-European STOXX 600 index dropping 1 percent .STOXX and the euro down 0.5 percent against the dollar at $1.1630 EUR=EBS as the stability of Germany's coalition government remained in focus.
Mr Seehofer and Mrs Merkel have been at odds over Germany's approach to mass migration.
After nearly eight hours of talk with the CSU party leadership, Mr. Seehofer said he saw three options: The CSU bows to the chancellor's asylum policy; or, as interior minister, he turns back some migrants at Germany's borders, a riskier option which could destroy the coalition; or, lastly, he resigns as party leader and minister.More news: Anonymous man buys $1 million worth of Toys 'R' Us inventory
He could defy her orders by ordering border police to carry out his plan, which would force her to fire him and nearly certainly break up the CDU-CSU alliance, or he could accept a humiliating climbdown or resign.
After weeks of tension stoked by a Bavarian regional party that's threatening to send back more asylum seekers at the border, its leaders are meeting in Munich on Sunday to decide.
In a televised interview on Sunday, Merkel said "The sum of everything we have decided has the same effect [as national measures]".
Merkel had set off for a European Union migrant summit in Brussels last week to fight for a deal that would appease her hardline allies, preserve her already unstable governing coalition and defend an embattled European Union.
In the third - and least likely option - Seehofer would resign and the CSU would leave government, "the nuclear option", according to Traugott.
"They need to get their act together", Daniel Guenther, the CDU premier of Schlewsig-Holstein state, said of the Bavarian party on ARD television. This could see to her trying to lead a minority government, or possibly new elections. "The conflict between the CSU and CDU would continue", Traugott said. The CSU is facing a state election in Bavaria in October, and has opted to take a hard-line anti-immigration stance as its main campaign strategy.
Seehofer and Merkel are in a dispute over Germany's asylum policy.
Merkel's move came after the European Union's 28 members hammered out a hard-fought deal Friday to tackle migration and avert a crisis that has threatened the very fabric of the bloc.