Her unpopular policy was a large reason why her party, the Christian Democratic Union, crashed and burned in last September's elections.
After a meeting with Seehofer on Saturday evening, Merkel told the German broadcaster ZDF on Sunday that the two people's meeting had "pretty good results", and she hoped to further work with her political ally CSU.
The deal also requires support from the Social Democrats, the third party in Merkel's government.
But SPD leader Andrea Nahles warned that "my patience has worn thin".
But after hours of tense negotiations, the Associated Press reported Seehofer emerged from talks saying he had reached a compromise with Merkel and that he would remain in his positions.
Member countries could also create processing centres to determine whether the new arrivals are returned home as economic migrants or admitted as refugees in willing states.
The compromise deal between Merkel and Seehofer suggests refugees arriving at the Austrian-Bavarian border who were first registered in European Union states that now refuse to take them back, such as Hungary, should be sent back to Austria. In controlling Germany's southern border to a greater degree than it has been recently, Germany will establish transit zones where migrants will be screened and those who have already applied to asylum elsewhere in Europe sent there - a move upholding the word of European law as laid out in the so-called Dublin regulations.
Supporters of German AfD wave flags in front of the Brandenburg Gate in Berlin, Germany, Sunday, May 27, 2018.
"After intensive discussions between the CDU and CSU we have reached an agreement on how we can in future prevent illegal immigration on the border between Germany and Austria", Seehofer said as he left the CDU's Berlin headquarters.
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Mark and Kym Hilinski found out after they agreed to give Tyler's brain to the Mayo Clinic in Minnesota for an autopsy, they said. There's not enough out there".
That left him with only three options.
As the CDU and CSU parties hunkered down in Berlin and Munich, leaders on both sides sought to clarify what was a stake.
Some Social Democrats accuse the CSU of wanting to appear tough on immigration before a regional election in Bavaria in October where the conservatives are expected to lose voters to the anti-immigrant party Alternative for Germany.
Speaking to reporters Merkel stressed that the compromise was in keeping with European Union rules.
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.
But the CSU and CDU together form a center-right force that has dominated national politics for decades. This week, she has agreed to build border camps for asylum seekers and to tighten the border with Austria.
Merkel could have fired Seehofer. "With this the very spirit of partnership in the European Union is protected and at the same time, it is a decisive step towards organizing and managing secondary migration", Merkel said.
German Chancellor Angela Merkel has been criticized for adopting a much too relaxed policy on immigration.