Germany's Social Democrats have chosen deputy leader and Hamburg mayor Olaf Scholz as the new interim head of the party until a permanent chairman can be elected in April.
Results of the SPD ballot are due on March 4.
Seeking to restore order, Schulz resigned with immediate effect on Tuesday and party leaders installed Scholz as caretaker SPD chairman.
The SPD's 464,000 members vote in a postal ballot beginning on February 20 on whether the party should go ahead with the agreement its leaders clinched last week to renew their power sharing alliance with Merkel's conservative bloc.
Nahles, a plain-speaking 47-year-old former labor minister with a left-wing slant and strong oratory skills, is the frontrunner and would become the first female leader in the party's 154-year history.
Mr Merkel's conservative alliance and the SPD each had their worst election result in the post-war period in September, while Germany's left and right fringes were strengthened.
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An SPD member since she was 18, Nahles is credited with helping to swing her divided party behind agreeing to take up the coalition talks with a passionate speech at a special party conference in January. Many SPD rank and file members harbour serious misgivings about entering into a new government with Merkel again.
Nahles said she would start campaigning at the weekend for members to vote "yes" to a coalition with Merkel, who has led the European Union's most populous country and economic powerhouse since 2005. At the time he was still hoping to become foreign minister by giving up the leadership, a plan he had to abandon in the face of massive opposition.
In a cartoon on Tuesday, the Sueddeutsche Zeitung daily showed Nahles with a whip riding an SPD snail. Media have speculated that one option might be Katarina Barley, a former SPD general secretary and family minister, or SPD veteran Thomas Oppermann.
Among supporters of Merkel's Christian Democrats and their Bavarian sister party, the Christian Social Union (CSU) - with whom the SPD are poised to form a with coalition government - 71.6 percent were critical of the SPD's ability to govern.
Schulz's other announcement Friday - that Andrea Nahles, the party's parliamentary leader, would take over as the Social Democrats' chairwoman - also gave rise to a chorus of concerns.
The SPD originally wanted to reinvent itself in opposition but reconsidered when Merkel's attempt to form an alliance with two smaller parties failed late a year ago.