Kramp-Karrenbauer has been the CDU's general secretary, in charge of day-to-day political strategy, since February.
She narrowly defeated Friedrich Merz, a millionaire lawyer, who received 482 votes at the party conference.
While close to Mrs Merkel in many areas, she has been careful to distance herself on some topics and says she and the chancellor have had "very lively discussions" together.
Kramp-Karrenbauer's pitch centred on her own lengthy experience in regional government, which saw her become the first woman to become a German state's interior minister, or top security official, and serve as governor of western Saarland state.
Newly elected party chairwoman Annegret Kramp-Karrenbauer waves after the election at the party convention of the Christian Democratic Democratic Union CDU in Hamburg, northern Germany, Friday, Dec. 7, 2018. "And this is the motivation with which I am here and why I run for CDU party leadership", Spahn said.
What does Ms Annegret Kramp-Karrenbauer's appointment mean for Germany?
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Kramp-Karrenbauer says she knows how to win elections, having defied expectations to win re-election in Saarland by a wide margin previous year.
After being nominated by Chancellor Merkel, AKK was elected as CDU general secretary with a record 98.9% of the vote.
After a smattering of applause throughout the course of her final speech as CDU chief, Merkel was bid farewell with a rousing standing ovation that lasted about 10 minutes and included a brief encore.
"People, we have a lot to get done today", Merkel told them.
The third candidate, health minister Jens Spahn, appears to have less chance of winning. Kramp-Karrenbauer is 56 and Merz 63, only a year younger than the chancellor.
"It has been a great pleasure for me, it has been an honour", Merkel said, as she received a standing ovation lasting almost 10 minutes, and she was herself trying hard to hold back tears.
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Kramp-Karrenbauer had urged Germany's ruling party to remain a broad-based political force, calling the CDU the "last unicorn" in Europe's polarized political landscape.
"There is still huge respect for Merkel because she gave stability in Europe at a time when things were rocky", said Judy Dempsey, a nonresident senior fellow at the Carnegie Europe think tank.
Months before the national election where the CDU slumped to its worst result since 1949 winning just 32.9 per cent of the national vote, she managed to secure over 40 percent of the vote in Saarland, marking her out as a victor in a field of losers. Merkel's fourth-term governing coalition with the center-left Social Democrats has lurched through a series of crises since taking office in March, and the CDU has lost supporters both to the liberal Greens and the far-right Alternative for Germany. The most recent opinion polls put the CDU between 27% and 30%.
"In times like these, we will defend our liberal views, our way of life, both at home and overseas", Merkel told deputies according to Reuters.
"Whether it's the rejection of multilateralism, the return to nationalism, the reduction of global 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.
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They also have focused on his potential successor: Nick Ayers , the chief of staff to Vice President Mike Pence. As Trump spoke to the media in a visit to Trump Tower in New York, Kelly sat by the side, grimacing.