Mrs Merkel's Christian Democrats (CDU), led in Lower Saxony by Mr McAllister, thought themselves on the verge of a come-from-behind victory in the north-west state, a major agricultural and industrial region and Germany's closest approximation to a US-style swing state.
However, they came up short on Sunday, losing power to the centre-left Social Democrats (SPD) and Greens who together won one more seat in the state assembly than the centre right.
It was a bitter defeat for the 58-year-old chancellor, even though she remains a strong favourite to win a third term in a federal election in eight months, but an even worse result for Mr McAllister.
The son of a soldier from Glasgow, Mr McAllister, 42, rose rapidly through the party ranks to become Lower Saxony's Prime Minister in 2010.
A Rangers fan who married in a kilt, he declared on the eve of Sunday's vote he was happy to be "Merkel's Mac" – a reference to the problem Germans have pronouncing his surname.
Now his meteoric rise has stalled, leaving him with an uncertain political future.
Speaking at a news conference in Berlin yesterday, Mrs Merkel said: "I'm not going to pretend, after all the feelings generated by this election, defeat hurts even more. We are all sad today. Sad that it didn't work."
The result gives the centre-left a majority in the Bundesrat upper house of parliament, meaning the opposition can block major legislation from Mrs Merkel's government and initiate laws themselves.
That will not change after the national election in September, even if Mrs Merkel's centre-right coalition with the Liberal Free Democrats (FDP) manages to hold on to power.
In the run-up to the federal vote, her room for manoeuvre will be limited and she can take a more cautious stance on a range of policy issues, including her management of the eurozone debt crisis.
Mr McAllister's role in Sunday's defeat is now likely to come under scrutiny, in particular his not-so-subtle hints to supporters in the election run-up that they use their votes to back coalition partners, the FDP.
His message clearly resonated with CDU voters but perhaps stronger than he would have liked.
The FDP ended up with a surprisingly strong 9.9%, largely thanks to CDU supporters who split their two votes.
Yet the FDP's gains appear to have come at the expense of the CDU, which scored 36%, down 6.5 points from their last result in Lower Saxony in 2008 and well below the 40%-plus that opinion polls had forecast.
The CDU has now suffered defeats to the SPD and Greens in five states in two years.