Her Christian Democratic Union (CDU) clinched 34.3 percent of the vote in North Rhine-Westphalia, first results showed, snatching control of the sprawling industrial region which has been a Social Democratic Party (SPD) stronghold for decades.
The SPD only managed to garner 30.6 per cent, sharply down from its 2012 score of 39.1 per cent, in a serious hit to confidence ahead of general elections in September.
"The boxer SPD has received a serious punch but is still standing," he said.
With a fifth of Germans -- 13.1 million -- eligible to vote in North Rhine-Westphalia, an election in the western state is always closely watched.
It carries even higher stakes this year, being the last regional vote before national polls and having a direct impact on whether the SPD can close a nationwide gap of around 10 percentage points with the CDU.
"We are going into the national elections with a lot of confidence," said lawmaker Michael Grosse-Broemer, who heads the CDU parliamentary group in the Bundestag, noting that the latest win gave the party an extra boost.
Schulz himself had acknowledged the importance of today's vote after casting his ballot in his hometown of Wuerselen.
"The result today is above all one of the regional elections in North Rhine-Westphalia. But it's a vote that will have an influence, there is no question about that," he said.
The SPD had already suffered two setbacks since Schulz took over, with the CDU scoring strong victories in the small states of Saarland and Schleswig-Holstein.
Schulz, who held more than 30 rallies in the state, had hoped that his push for "social justice" would resonate in NRW, which has lagged behind western Germany economically.
He argued that many people are struggling in temporary or low-paid jobs even though the country as a whole is growing richer.
But Merkel, who had also gone all out to sway the state of 18 million people, including 4.2 million of migrant origin, took aim at Schulz's arguments.
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