In a speech to the Munich conference on security policy, Chancellor Merkel said: "We are all determined to prevent the threat of an Iran with a military nuclear programme."
She said the Islamic republic must conform with international demands to stop enriching uranium "without ifs and buts and without tricks".
"What we are talking about here is a very, very sensitive technology and so we need a high degree of transparency, which Iran has failed to provide, and if Iran does not do this it risks falling deeper into isolation."
Dampened hopes
Ali Larijani, Iran's nuclear negotiator, is attending the annual high-level gathering and will give a speech on Sunday.
Larijani has said he will also meet European officials in Munich, who, it is believed, will try to get Iran to re-engage in talks over its nuclear programme.
He will have his first meeting in five months with Javier Solana, the EU foreign policy chief, but Solana's spokeswoman Cristina Gallach dampened hopes of a major step forward.
"There will be no breakthrough. It will be an opportunity for an exchange of views," she said.
Larijani struck a defiant tone as he arrived in Germany, saying Iran's nuclear activties were "under the supervision" of the International Atomic Energy Agency and that the country was committed to its engagements under the nuclear Non-Proliferation Treaty.
"Iran is following a clear path in its nuclear activities and this not hidden to anyone," he told the Iranian state agency.
Limited sanctions
Iran rejects a UN Security Council resolution of December 23 which imposed limited sanctions to force it to stop enriching uranium.
Uranium enrichment uses centrifuges to make fuel for civilian nuclear reactors but can also be used to make material for bombs, although Iran denies it is developing nuclear weapons.
In Iran itself, hundreds of thousands of people were to rally on Sunday in an annual show of support for the Islamic revolution, with the country's leaders promising a major announcement which was expected to focus on the achievement of a new stage in uranium enrichment.
