She was narrowly voted into power with 51.8 percent of votes - 517 votes from 999 cast - by CDU delegates.
German Chancellor Angela Merkel on Friday, December 7, offered a staunch defense of her moderate course during 18 years as party leader, as her Christian Democratic Union chose between a loyal deputy and a longtime rival to succeed her.
The two main candidates, CDU general secretary Annegret Kramp-Karrenbauer, known as AKK, and corporate lawyer Friedrich Merz, are locked in a battle over whether to embrace or break with the veteran chancellor's legacy.
Health Minister Jens Spahn, another Merkel critic, is considered the outsider.
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"Whether it's the rejection of multilateralism, the return to nationalism, the reduction of worldwide cooperation to deal-making or threatened trade wars. hybrid warfare, destablisation of societies with fake news or the future of our European Union - we Christian Democrats must show in the face of all these challenges what we've got", she said. Whoever wins will be favourite to run for chancellor in the next election, though that isn't automatic.
"It has been a great pleasure for me, it has been an honour", she said to a standing ovation lasting almost 10 minutes, and fighting to hold back tears.
A senior CDU official, speaking on condition of anonymity, said many delegates were undecided before the congress and could be swayed by how the candidates present themselves on Friday.
She also celebrated Germany's balancing its budget in recent years and its response to the eurozone debt crisis.
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Fire alarm bells rang out through the building announcing it was being evacuated. Security officers evacuated the building as a precaution and called police.
Mr Merz, 63, who lost out to Dr Merkel in a power struggle in 2002 and is returning to politics after a decade in business, is backed by CDU members exhausted of Dr Merkel's consensual politics.
Even AKK herself said there was nothing mini about her as a 56-year-old woman with grown-up children and an entire political career of her own.
While she has called for tougher policies on refugees who commit crimes, AKK firmly backed Merkel's fateful 2015 decision to welcome more than one million asylum-seekers from crisis zones such as Syria and Iraq.
For years, Merkel's popularity lifted the CDU and its Bavaria-only sister party, the Christian Social Union.
"In hard times we shouldn't forget our Christian and democratic stance", she said.
(AAP) German Chancellor Angela Merkel receives a standing ovation as she farewells her party leadership.
Merkel appealed to the party to show unity, noting that arguments in recent years over migration have showed "where endless arguments lead".
"I am grateful for the time that is behind me, and I am glad for being able to continue working as chancellor", she said. 'I have always wanted to do my government and party jobs with dignity, and one day to leave them with dignity'.
"Now it is time to open a new chapter", Merkel said. "Dear delegates, I stand before you as I am and as life made me and I am proud of that", Kramp-Karrenbauer said in a passionate speech to the congress.