"It is essential that progress is made in the Middle East peace process because that would allow an improvement in the chances for an agreement with Iran," Merkel said in Berlin after talks with Jordan's King Abdullah II.
"It has to be made clear that peace in the Middle East is indispensable for the whole world."
Germany is one of six powers — with the United States, China, France, Britain and Russia — trying to persuade Tehran to abandon its nuclear programme, fearing that Iran wants to develop atomic weapons.
The UN Security Council has slapped three sets of sanctions on Iran, which insists its nuclear activities are only to produce electricity.
Widely considered to be the Middle East's sole nuclear armed power, Israel considers Iran its arch-enemy after President Mahmoud Ahmadinejad said that the Jewish state is doomed to be wiped off the map.
Israel's new Prime Minister Benjamin Netanyahu has said repeatedly that Iran's nuclear programme constitutes the biggest concern for the Jewish state since its creation in 1948.
US President Barack Obama, who has sought to open up diplomatic channels with arch-foe Iran, held talks with Israeli President Shimon Peres on Tuesday.
He has invited Netanyahu, Palestinian leader Mahmud Abbas and Egyptian President Hosni Mubarak to Washington for talks in the coming weeks.
On Thursday, Israel's new Foreign Minister Avigdor Lieberman is due to hold talks in Berlin with his German counterpart Frank-Walter Steinmeier.
The minister, who has been attacked by critics over his views on Israel's Arab citizens, is on a five-day tour of Europe also taking in Italy, France and the Czech Republic, current holder of the European Union presidency.
A spokesman for the foreign ministry in Berlin said that there would be no news conference after Steinmeier and Lieberman's talks but there would be a statement issued either late Thursday or on Friday morning.
