The Merkel-Seehofer deal comes after her interior minister, from the CSU, a minor party in the coalition, had threatened a rebellion that could have destabilised the government.
The Austrian Chancellor, Sebastian Kurz, has said that Germany's new migration agreement, which ended a political crisis in Angela Merkel's government, could force Austria to introduce tougher border checks on Italy and Slovenia.
Under the new policy, which is still pending approval of the Social Democrats, another party in Merkel's delicate coalition, Germany would create so-called "transit centers" along the border.
Germany's constitution prevents federal ministers from outright quitting their positions, and must request to be dismissed by the German President.
In effect, the likely outcome of the deal is as Dr Merkel wished - a European one.
Last week, Merkel met with other European leaders and agreed to start limiting migrant asylum seekers' movement around Europe - called "secondary migration".
In cases where no such bilateral agreements exist, the asylum seekers would be sent back across the border "on the basis of an agreement with Austria" that was to be negotiated, it said.
After half a year of coalition building, Seehofer, having been ousted by ambitious rival Markus Soeder as Bavarian state premier, returned to Berlin, where he previously held ministerial posts, to rejoin Merkel's cabinet.
"We have agreed a new regime on the German-Austrian border that means we can prevent asylum seekers, whose asylum process is the responsibility of other European Union nations, from entering the country", the CDU-CSU said in a joint statement.More news: Melania Trump makes second solo trip to border
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Both sides hammered out "a truly good compromise ... after a tough struggle and hard days", Merkel said, describing the holding and processing centres.
Seehofer told party colleagues at an executive committee meeting on Sunday that discussions with Merkel had been fruitless, according to a party source.
Mrs Merkel got backing from both parties at a parliamentary meeting on Monday.
He could defy her orders by ordering border police to carry out his plan, which would force her to fire him and nearly certainly break up the CDU-CSU alliance, or he could accept a humiliating climbdown or resign.
The Social Democrats, who rejected a similar plan three years ago, withheld their immediate consent and European Union states must also agree to take migrants back. "A majority of Germans back the chancellor".
However, the more conservative CSU believes its credibility is at stake as it tries to curb support for the rival anti-migration Alternative for Germany party in the Bavarian election.
The "Free State" with its beer-and-lederhosen Alpine traditions, powerful industries and impenetrable dialect has a more conservative bent than other German regions.
Political stability was upset by Merkel's 2015 decision to keep borders open to migrants and refugees arriving from the Middle East via the Balkans, Hungary and Austria.