German Chancellor Gerhard Schroeder says he wants a general election this autumn - a year early - after his party lost a key regional election.
The CDU described the vote as a 'sensational result'
Opposition Christian Democrats were jubilant after beating his Social Democrats in North Rhine-Westphalia.
"The bitter result... jeopardises the political basis for the continuation of our task," Mr Schroeder said.
The Social Democrats had ruled in the state for 39 years; high unemployment was a key factor in their defeat.
With five million unemployed across Germany as a whole, the general election may turn on the same issue, says the BBC's Ray Furlong in Berlin.
The Social Democrats (SPD) are also lagging behind in national polls.
Mr Schroeder's Social Democrat-led government not only lost its traditional powerbase on Sunday, but it now has so few seats in the upper house of parliament that its ability to actively govern is massively diminished, our correspondent says.
The SPD setback in North Rhine-Westphalia - Germany's most populous state - was even bigger than the Social Democrats had expected, and the worst for the party in half a century.
Official results showed them taking 37.1% - with the Christian Democrats comfortably ahead with 44.8%.
The CDU leader Angela Merkel said the voters had given her party "a sensational result".
Ms Merkel is likely to challenge Mr Schroeder and she may now have a good chance to become Germany's first female chancellor as her party also enjoys a strong lead in national opinion polls, our correspondent says.
Faced with the prospect of further defeats in regional elections, possibly a rebellion within his own ranks, and pressure for his top ministers to resign, Mr Schroeder has chosen to come out fighting, says our correspondent.
He said his programme of social reforms was already yielding results but "for the reforms to be pursued, the majority of Germans must clearly back them now".
AGENDA 2010 LABOUR REFORMS
Cuts in welfare payments
Retirement age raised to 67
Tax breaks reduced
Pressure on long-term jobless
Job centres overhauled
Early elections in Germany are highly unusual.
The last time elections were held earlier than scheduled was in 1983 and it is not even clear what the precise constitutional mechanism is for bringing the elections forward.
Some 13 million people were eligible to vote in Germany's most industrialised state.
North Rhine-Westphalia includes the Ruhr Valley, known for its coal and steel production.
Its economy and population are bigger than many European countries, and its GDP is higher than that of Brazil or Russia.
But, of Germany's five million unemployed, more than one million live in North Rhine-Westphalia.
For nearly four decades, the Social Democrats have ruled there, benefiting from the solid working-class electorate.