Angela Merkel faced fresh challenges in her bid to form a new government on Monday, as one of her strongest allies stepped aside to make way for a right-wing rival in Bavaria.

Horst Seehofer, leader of Christian Social Union (CSU), stepped aside as prime minister of Bavaria to be replaced by his popular rival Markus Soeder, who is a fierce critic of Mrs Merkel's refugee policy.

Mr Seehofer’s future had been in question since his party secured its worst result in decades during September’s election, when it lost ground to the far-right Alternative for Germany (AfD).

In a vote yesterday, which was forced by a group of rebel MP’s, it was unanimously decided by the 101 strong CSU parliamentary group that Mr Seehofer would step down as prime minister, but stay on as party leader - a less influential post.

The change could weaken Mrs Merkel, the German chancellor, as she attempts to negotiate with the centre-left Social Democrats (SPD).

Angela Merkel and Martin Schulz, leader of Germany's social democrat SPD party credit: TOBIAS SCHWARZ/ AFP

The SPD agreed on Monday to enter into talks on forming a new government with Mrs Merkel, which the chancellor hopes will lead to a coalition deal.

But the proposals they have put forward on immigration - a major sticking point in previous failed negotiations - may create conflict.

Mrs Merkel turned to the SPD after failing to form a three-way alliance with the left-leaning Greens and the pro-business Free Democrats, plunging Germany into a political impasse and raising doubt about her future after 12 years in power.

The SPD said that it was opposed to the conservative plan to extend a ban on the right to family reunions for some asylum seekers that expires in March. “Family reunions and the cohabitation of a family lead to good integration,” the SPD said in a document.

“That’s why we are against the extension of the suspension.”