At talks that ran into the early hours of Tuesday, Merkel and the leaders of Germany's 16 states agreed to call on citizens to stay at home for five days over Easter.
The measure would have meant all stores, including essential ones, closing for an extra day on April 1.
It triggered a backlash, with businesses lamenting more shutdowns and medical experts saying it was not tough enough to prevent the exponential spread of more infectious variants of the virus.
"The idea of an Easter shutdown was drafted with the best of intentions. We urgently need to stop and reverse the third wave," Merkel told reporters on Wednesday.
But it was not possible to implement the measures so quickly, Merkel said, apologising for the added uncertainty that it had caused Germans.
"This mistake is mine alone," she said. "I ask all citizens for forgiveness."
Germany, with a population of 83 million, reported 15,813 infections on Wednesday while the death toll rose by 248 to 75,212.
Deaths have fallen from earlier in the year when vaccinations had not begun, but admissions to intensive care units are creeping up and the seven-day incidence of cases per 100,000 - which the government has used as a metric to decide on lockdown steps - stands at 108 compared with 86 a week ago.
Merkel's apology came against a backdrop of growing public frustration with her government over the slow rollout of COVID-19 vaccines and extended lockdown measures.
A poll released on Wednesday showed public support for her conservatives slumping to its lowest in over a year ahead of a national election in September.
'THERE IS NO BLUEPRINT'
After making her statement to reporters, Merkel again acknowledged her mistake before lawmakers, some of whom heckled her. She then reiterated her apology, to applause from other parliamentarians.
The business lobby quickly rallied behind her.
"The chancellor's courageous decision demonstrates leadership," said employers' president Rainer Dulger. "There is no blueprint for managing this crisis."
The HDE association of retailers also welcomed Merkel's announcement, saying that closing stores for an extra day ahead of Easter would have caused logistical problems and prompted shoppers to rush to stock up earlier.
"With today's decision, a bit of reason is returning to coronavirus policy," HDE president Stefan Genth said.
Finance Minister Olaf Scholz, who is his centre-left Social Democrat party's candidate for chancellor in the election, said Merkel made the right decision to reverse the Easter lockdown plans, but that the government had to avoid similar mishaps.
"We have to prepare such decisions well and in a better way in the future," he told reporters on Wednesday.
Christian Lindner, head of the opposition pro-business Free Democrats, called on Merkel to ask parliament for a vote of confidence.Merkel, who has led Germany since 2005, has said she will not stand for a fifth term in September.
Her conservative bloc has yet to settle on a chancellor candidate, and is already missing the "Merkel bonus" she has brought them with four consecutive national election victories.
It suffered historic defeats in two state elections this month, hit by public frustration over vaccines and lockdowns as well as a scandal over the procurement of face masks.
"I am convinced that we will beat the virus together," Merkel said on Wednesday. "The path is difficult and rocky, and it is marked by successes but also by mistakes and setbacks. But the virus will slowly but surely become less scary."