Seehofer said he was ready to step down as minister and chair of his Christian Social Union (CSU) at a meeting where his party's leadership was discussing whether to accept immigration proposals Merkel brought back from Brussels last week.
Her CDU and its sister party CSU suffered heavy losses in the country's federal elections past year while the far-right Alternative for Germany (AfD) party scored record gains and entered parliament for the first time.
Merkel has also confirmed that a good compromise was reached, with her party's chairwoman, Annegret Kramp-Karrenbauer, saying the deal will prevent migrants registered elsewhere from entering Germany.
Two weeks ago, he gave Ms Merkel an ultimatum to find a European solution to irregular migration by today, or he would turn migrants back at the border against her wishes. Asylum seekers will be returned from those centers to other European countries where they first entered, if there are arrangements with those countries.
After nearly 13 years in power, she finds herself openly challenged in her government and political family, fought in Europe, particularly by her neighbours in the East and Austria, and finally in conflict with US President Donald Trump on a multitude of topics.
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Merkel reiterated her position that if countries start turning migrants away at national borders unilaterally, it would cause neighboring countries to close their borders and jeopardize the border-free movement within the EU. "And what follows now is a very sustainable and clear agreement for the future".
Leaders agreed to set up "voluntary" control centres within the European Union to process migrants.
Merkel has insisted on Europe-wide solutions to handling the waves of foreigners trying to reach the continent and the standoff could spell the end of her fourth government.
As the CDU and CSU parties hunkered down in Berlin and Munich, leaders on both sides sought to clarify what was a stake.
Ahead of a hard Bavarian state election in October, the CSU is determined to show that it is tough on migration.
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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.
Alternative for Germany (AfD)'s demonstrators holding placards and German flags gather at the main station in Berlin to attend the "demonstration for the future of Germany" called by the far-right AfD in Berlin on May 27, 2018.
In fact, the number of asylum seekers in Germany has fallen dramatically to pre-2015 levels, thanks in part to Merkel's more restrictive policies in recent years.
The German leader, under whose watch over a million migrants came into the country since 2015, was challenged by her rebellious Bavarian allies who threatened her to change the course of the nation or face the collapse of the delicate coalition government and therefore her leadership.
In Vienna, Kurz's government also said that if Germany approves this plan, Austria would have no choice but to respond with a version of its own, taking "measures to protect our southern borders in particular".
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Opinion polls point to the AfD making a similar entrance to Bavaria's regional legislature in October - giving it seats in all of Germany's 16 states.