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Merkel's government has already criticised the Cologne court ruling and promised a new law to protect the right to circumcise male infants, but the conservative leader's strong comments underline how sensitive Germany is to charges of intolerance because of its Nazi past.
"I do not want Germany to be the only country in the world where Jews cannot practise their rituals. Otherwise we will become a laughing stock," the Bild daily quoted Merkel as telling a closed meeting of her Christian Democrats (CDU).
Joerg van Essen, parliamentary floor leader of Merkel's junior coalition partner the Free Democrats, told the Financial Times Deutschland newspaper that the new law would be introduced in the autumn.
The main political parties represented in Germany's parliament were negotiating the text of a resolution late on Tuesday that would exempt from punishment circumcision of under-age boys, parliamentary sources told Reuters.
The parties want to pass the resolution on Thursday when the lower house, the Bundestag, interrupts its summer recess to vote on a bailout for Spanish banks.
The Cologne court, ruling in the case of a Muslim boy who suffered bleeding after circumcision, said the practice inflicted bodily harm and should not be carried out on young boys, but could be practised on older males who give consent.
This is not acceptable under Jewish religious practice, which requires boys to be circumcised from eight days old, nor for many Muslims, for whom the age of circumcision varies according to family, country and branch of Islam.
Jewish and Muslim groups have branded the court ruling an attack on their religious freedom and Jewish leaders say it could even threaten the continued existence of their community in Germany - a disturbing claim for a country still haunted by the Nazis' murder of 6 million European Jews in the Holocaust.
But the court ruling has drawn support from some, including Britain's Secular Medical Forum, which has written to Merkel urging her to resist pressure to make non-consensual circumcision lawful.
"We are shocked that religious groups deny the harm (caused by circumcision) and at the distorted and disingenuous claims made by those opposing the court's decision, wrongly suggesting that it is an indication of anti-Semitism," the chairman of the Secular Medical Forum, Dr. Antony Lempert, said in the letter.
"We urge you not to let such emotional blackmail persuade you to change the law or criticise the court's decision. As it stands, the court's decision ensures that today's children will be free to grow up to make their own decisions," it said.
Echoing such comments, Ronald Goldman, head of the U.S.-based Jewish Circumcision Resource Center, which opposes the practice, cited studies he said show that circumcision causes considerable pain and trauma.
"The majority of the world does not circumcise because of an instinctive awareness of the harm, analogous to cutting off any other healthy body part," it said in a statement entitled "The German Circumcision Ruling: What about the harm to the child?"
The German court ruling applies only to the city of Cologne and its environs - home to a large Muslim minority - but Jewish and Muslim groups fear it could set a precedent and the ban could spread to other parts of Germany.
German doctors have also urged politicians to act to clarify the legal situation, fearing the ruling may force circumcisions underground and increase health risks for young boys.
Germany is home to about 120,000 Jews and some 4 million Muslims, many from Turkey, which has criticised the court ruling.