Chancellor Angela Merkel admitted on Monday she had misjudged her response to allegations of far-right sympathies against Germany's spymaster, after resolving a row over his redeployment that threatened to pull her government apart.
BfV intelligence agency head Hans-Georg Maassen's political views came under the microscope this month after he questioned the authenticity of video footage showing radicals hounding migrants in the eastern city of Chemnitz.
Merkel's Christian Democrats (CDU), their Bavarian Christian Social Union (CSU) sister party and the third coalition partner - the center-left Social Democracts (SPD) - agreed last week to transfer Maassen to a senior role in the Interior Ministry.
But that prompted a public blacklash when it emerged that Maassen would also get a pay rise. The coalition rescinded the hike on Sunday after some members of the SPD called for their party to quit the alliance if it stayed in place.
"I focused too much on functionality and processes in the Interior Ministry and not enough on what moves people, rightly, when they hear of someone's promotion," Merkel told reporters, a year to the day after an inconclusive national election consigned Germany to six months of political limbo.
"I regret very much that that was allowed to happen... It is important that we now solve the problems of the people."
The dispute had irritated Germans worried about more immediate issues such as rising real estate prices, prospects for pensions and a diesel emissions scandal, and frustrated authorities in Brussels used to Berlin playing a lead role in major euro zone issues.
But Annegret Kramp-Karrenbauer, general secretary of Merkel's party, rejected suggestions that the row showed that a weaekened Merkel was no longer able to run an effective, decision-taking government.
"She said very clearly that the first decision was a mistake, and I think that's a sign of strength," she told ARD public television, adding that the coalition parties would coordinate more closely to avoid similar spectacles in future.
The clumsy compromise over Maassen, who has not commented in public about the allegations against him, unraveled on Friday when SPD leader Andrea Nahles said it was a mistake.
Support for all three parties has fallen since the election and there is little appetite among them for another ballot that polls suggest would strengthen the far-right Alternative for Germany (AfD) party.
The coalition came close to collapsing in June over a dispute over immigration and border controls.
EU Budget Commissioner Guenther Oettinger, a member of Merkel's CDU, complained in an interview on Sunday that a year in Europe had been wasted since Germany's last federal election. He said other EU countries expected the government of its largest economy to finally start tackling European issues.