Voting stations opened across the country at 8am (0600 GMT) for the vote called by Schroeder one year early, in a risky bid to win a fresh mandate for his reform programme.
It has made for the shortest election campaign in German post-war history, and a race so close that the two main parties have broken with tradition and will campaign right up to the end of polling on Sunday at 1600 GMT.
Opinion polls have predicted that Merkel’s Christian Union will win more than 40% of the vote, but that Schroeder’s resurgent Social Democratic Party (SPD) may yet keep her from forming a government with her chosen partner, the pro-business Free Democrats.
A poll by the Allensbach institute published in Saturday’s Frankfurter Allgemeine Zeitung indicated the Christian Democrats would take 41.5% of the vote and the Free Democrats 8% – barely enough to form a government.
Merkel, 51, who grew up in the former East Germany, has pledged to revive the stalled economy, Europe’s biggest.
She has said she will slash the more than 11% jobless rate with a programme of income tax cuts and labour market liberalisation that will go beyond Schroeder’s own controversial economic reform package.
Schroeder delivered a blistering
Schroeder has put up a tough fight in recent weeks, eroding Merkel’s once formidable lead by arguing that only the Social Democrats can reform the German economy in a spirit of fairness towards rich and poor.
Political analysts expect a razor-edge result that will either grant Merkel her wish or force her into an awkward union with the Social Democrats.
She has warned that such a union will be a recipe for “gridlock”, but many Germans appear to have warmed to the idea of economic reform with the tempering influence of the Social Democrats.
Schroeder has ruled out participating in such a government, and would likely retire from politics after seven years as chancellor.
Far less likely is a left-wing coalition featuring the Social Democrats, their junior partner the Greens, and a new alliance called the Left Party, mainly due to the bad blood with the Left Party’s chief candidate Oskar Lafontaine, a former SPD leader and finance minister who resigned.
The first results are expected shortly after voting stations close.
At a rally in the former capital Bonn on Saturday, Merkel said Schroeder’s centre-left government had been a “failure”, with 4.7 million Germans jobless, and that she had given voters a clear picture of what she would do as chancellor.
“We will not make false promises about how to get Germany moving again”Opposition leader Angela Merkel
“We will not make false promises about how to get Germany moving again,” the former physicist said.
Known as a technocrat, Merkel offered a rare glimpse of her personal motives in the race, with a reference to her upbringing under communism.
“My life changed completely after the fall of the Berlin Wall,” she said, encouraging voters not to fear a new beginning.
“I know that change can bring about something good.”
The charismatic Schroeder told about 18,000 backers in the western city of Frankfurt that he would prove pollsters wrong with a stunning come-from-behind victory.
“Don’t worry about my future,” he said. “My future is to remain chancellor.”
George Bush had the opposition
He delivered a blistering attack on Merkel’s foreign policy, saying that she had come down on the wrong side of history by supporting US President George Bush during the Iraq war.
“She discredited Germany abroad,” he said, referring to a visit Merkel made to Washington in the run-up to the invasion of Iraq. “And that is indecent.”
Schroeder vocally opposed the Iraq war during the general election campaign in 2002, which badly strained ties with the US administration.
Merkel has pledged to revive that relationship.