FRANKFURT — Germany’s largest opposition party appeared likely to retain power in an important state election on Sunday that could sway the balance of power in Berlin and stymie efforts to strengthen oversight at Volkswagen, which dominates the region’s economy.

The Social Democrats, a mainstream party to the left of center, had a slight lead over Chancellor Angela Merkel’s Christian Democrats, according to unofficial early results.

If confirmed by official tallies, the result would be a blow to Ms. Merkel, who had visited Lower Saxony several times to campaign and is now negotiating to form a government in Berlin after her party’s poor performance in elections last month.

The victory of the labor-oriented Social Democrats would also be a setback for investors hoping for changes at Volkswagen, which is struggling to recover from a crisis resulting from its admission two years ago that it had equipped diesel cars with emissions-cheating software.