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.
The party's membership will vote next week on the coalition deal struck last week between Mr Schulz and Mrs Merkel.
The failure of Germany's established parties to form a government more than four months after national elections has eroded trust in the country's political system and hurt the SPD, Gesine Loetzsch, a former chairwoman of the post-communist Left, said in an interview with Bloomberg Television in Berlin on Wednesday.
However, Schulz, 62, announced two days later that he gave up the bid for foreign minister in the new government after he was heavily criticized by his party members as he previously said he wouldn't serve in the next German government.
If SPD members say no, a grand coalition will be dead.
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"If I can contribute to that by resigning, it will have been worth it", he said outside the SPD headquarters. The party's youth wing is already campaigning for a no-vote as it fears that another grand coalition with Mrs Merkel's conservatives will further erode the party's identity.
Tensions are also reported between him and Sigmar Gabriel, an SPD colleague who is now foreign minister.
If the coalition agreement is approved, Chancellor Merkel should be elected the chancellor for the fourth term by the German parliament by mid-March.
In a cartoon published on Tuesday, the Sueddeutsche Zeitung daily showed Nahles with a whip riding an SPD snail. After fierce criticism from some former allies, Schulz ditched plans to take the post of foreign minister. Media have speculated that one option might be Katarina Barley, a former SPD general secretary and family minister, or SPD veteran Thomas Oppermann. The SPD was at a record low of 16.5 percent, barely ahead of the far-right Alternative for Germany (AfD).
The centre-left party is on course to run six ministries, including finance and foreign affairs. Merkel's conservative bloc was also down 1 point at 29.5 percent.
Martin Schulz announced on Tuesday that he was giving up his position as the head of Germany's Social Democrats (SPD) effective immediately.