In this file photo taken on April 14, 2016, German Chancellor Angela Merkel (L) and then Bavarian state premier and leader of the conservative Christian Social Union (CSU) Horst Seehofer give a press conference at the Chancellery in Berlin.
But Seehofer said that agreement wasn't tough enough.
It is unclear what effect Seehofer's resignation as interior minister and CSU leader, if he goes through with it, would have on the alliance between the two conservative parties and their governing coalition with the center-left Social Democrats.
Germany's constitution prevents federal ministers from outright quitting their positions, and must request to be dismissed by the German President.
"The spirit of partnership in the European Union is preserved and at the same time an important step to order [has been taken]", Ms Merkel said.
The border deal, hailed by the German chancellor as a "good compromise", foresees setting up so-called transit centres on the southern border, where asylum seekers who have already been registered in other European Union countries will be held until they can be sent back to those countries.
Thomas Kleine-Brockhoff, director of the Berlin office of the German Marshall Fund, said Merkel's political capital is depleted.
German chancellor Angela Merkel halted the immediate threat of a government breakup in Europe's biggest economy, crafting a plan to tighten migration and keep her Bavarian sister party in the fold.
The two agreed to set up three transit centers for asylum seekers on the border with Austria, confining them there as their cases are quickly processed.
Last November, when Merkel was negotiating her fourth coalition, the long-time chancellor told German broadcaster ZDF she was "very sceptical" about leading a minority government and would rather call new elections.
Mr Seehofer wanted to turn such migrants away immediately at the border, but Ms Merkel argued that would cause a crisis as other European Union states refused to take them.
As the CDU and CSU parties hunkered down in Berlin and Munich, leaders on both sides sought to clarify what was a stake.
Seehofer and Merkel, who have long had a hard relationship, have sparred over migrant policy on and off since 2015.
The chancellor's frantic last-minute diplomacy was ultimately prompted by the CSU's fear of losing its cherished absolute majority in Bavaria's state parliament.
Austria is ready to impose new controls but is waiting to see if Germany goes ahead with the proposed new measures on its border, Herbert Kickl, the Austrian interior minister said.
Public anger and fear about the newcomers has given rise to the far-right, anti-Islam Alternative for Germany (AfD) party, which entered parliament a year ago and threatens Seehofer's CSU in Bavarian state polls in October.
"She was able to to compromise, but she's totally sold out her political principles with this".
"In the end, the government could fall and an old, proud party could descend into ridiculousness - and all of that to solve a problem that in reality hardly is one", given the dramatically lower numbers of asylum seekers arriving in Germany this year.