She vowed to fight to win upcoming state elections and took a swipe at Merz, who left politics after losing a power struggle with Merkel, by pointing to 18 years of uninterrupted service for the CDU.
The 56-year-old CDU secretary general, often referred to as "AKK", received 517 votes while candidate Friedrich Merz won 482 in the second round of the election.
Both men are seen as harbouring longstanding grudges against the chancellor, after she thwarted Schaeuble's ambition to become German president and Merz's desire to remain CDU parliamentary group leader several years ago.
Ms Kramp-Karrenbauer became the first woman to serve as a state minister for internal affairs in 2000 and the first woman to serve as prime minister of Saarland, a position she held from 2011 to 2018.
Merkel - who surprised her party and country in late October when she announced she would not be seeking re-election as CDU leader - on Friday delivered her farewell speech, receiving nearly 10 minutes of standing applause.
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.
Perhaps most controversially, she opposed gay marriage which was legalised in 2017 and supported by Merkel.
Kramp-Karrenbauer has differentiated herself from Merkel on social and foreign policy by voting in favor of quotas for women on corporate boards and taking a tougher line on Russian Federation. However, Carsten Brzeski, Chief Economist at ING Germany is less optimistic about the outcome, and doesn't see any clear way forward for the CDU in the wake of Kramp-Karrenbauer's close victory over her more conservative rival Merz.
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One of the most recent examples of Merz wanting a change of course for the CDU has been his outspoken criticism of the United Nations migration pact, which was revealed to have been largely drafted by the Merkel government starting in 2016.
A lot of them defected to the far-right Alternative for Germany over Merkel's controversial decision to openly welcome asylum seekers back in 2015 when hundreds of thousands of Syrians, Iraqis, Afghans and others came to Germany and other European Union countries to escape war and poverty.
The choice will be made by 1,001 delegates at a party congress in Hamburg, many of them professional or part-time politicians at federal, regional or local level.
"It has been a great pleasure for me, it has been an honour", she said, adding it was time for a new chapter.
She also celebrated Germany's balancing its budget in recent years and its response to the eurozone debt crisis. He won 157 votes.
"We will all miss her", he said.
During the leadership campaign, she took more a cautious stance on the future of Europe than Merz, who said Germany should "contribute more" to the European Union because it benefits from a euro that is "too weak for our economy".
The delegates rose and delivered a lengthy ovation to their long-time leader, with some holding up signs that simply said: "Thanks, boss".