Merkel said she expected a "very fast, very prompt" withdrawal of Russian troops from Georgia, calling it an "urgent matter".
"Georgia will become a member of Nato if it wants to - and it does want to," Merkel said.
It was one of the strongest statements yet of support for Georgia's Nato membership bid, which is opposed by Russia.
Russian troops remain deployed in the north and west of the country, including units within half an hour's drive of Tbilisi.
Russia says that regular forces will begin withdrawing on Monday, but that an unspecified number of Russian peacekeepers will remain.
Moscow is opposed to Georgia's attempt to join Nato. The Western military alliance is divided over how fast to accept Georgia, but has indicated that membership is a matter of when, not if.
Al Jazeera’s Jonah Hull said that the significance of Merkel's statement for Russia and Kremlin will be enormous.
"This is precisely what they were hoping to derail. They do not want Nato to encroach any further towards the Russian borders. Nato in Georgia is precisely what Russia does not want and this might be the only way that the West can find now to punish Russia."
Dmitry Medvedev, Russia president, ordered the withdrawal of troops from Georgian territory to begin on Monday at midday, according to the Kremlin.
"From tomorrow, Russia will begin withdrawing its military forces that are supporting Russian peacekeepers," Medvedev told Nicolas Sarkozy, his French counterpart, in a telephone conversation on Sunday.
Sarkozy's office said that the French president had warned Medvedev of "serious consequences" if it failed to implement the ceasefire pact it signed on Saturday.
Russian tanks and armoured personnel carriers rolled ino the breakaway Georgian region of South Ossetia on August 7 after the government in Tbilisi ordered a bombardment in an attempt to reassert its control.
A French-drafted six-point peace pact requires all forces in Georgia to withdraw to positions held prior to the conflict.
Hull, reporting from Tbilisi, said that the Russian withdrawal depended on Georgia's forces complying with the terms of the ceasefire and returning to barracks.
"The Georgians have also to comply, Medvedev has made it very clear that he expects to see that before the Russians pull back," he said.
"The question of whether the Russians will leave South Ossetia is another matter as under the terms of this peace plan they are entitled to maintain a peacekeeping presence as they did before this conflict began."
However, Russian forces have remained in force around the strategically important town of Gori, about 30km from South Ossetia, which controls the main road to the capital Tbilisi.
|Russian troops wil be allowed to carry out patrols inside Georgia [AFP]
Al Jazeera's Alan Fisher, reporting from inside Gori, said: "We are hearing from Russian military contacts around the town that the troops in Georgia are considered to be last in, so they will be the last out."
"In Gori itself there is still a very high Russian presence ... you can still see many Russian troops, they are digging trenches, their armoured personnel carriers, their tanks are now well hidden under camouflage."
Russian troops were reported to also effectively control the city and air base of Senaki, which which sits on a key intersection controlling access to the Black Sea port city of Poti and the road north to Abkhazia.
And on Sunday, Russia confirmed that it had taken over a major power plant in western Georgia.
Shota Utiashvili, Georgia's interior ministry spokesman, told Al Jazeera: "What we see on the ground clearly shows that Russia is not abiding by the ceasefire that its president has signed ... as of today we are not seeing any reversal of this threat, we are not seeing any withdrawal at all."
Under the peace deal, Russian troops, which entered the conflict to support the South Ossetian separatists, have the right to patrol "a few kilometres" deeper inside Georgia beyond the South Ossetia conflict zone, Georgian and French officials said on Saturday.
The French-drafted agreement calls for an end to all military action, free access to humanitarian aid. It also calls for a demilitarised border zone.
Earlier on Sunday, there had been confusion over Russia's plans after an army commander said that the pullout had already begun from the South Ossetian capital, Tskhinvali.
Irina Gagloyeva, a spokesman for the South Ossetian defence ministry, told Russia's Itar-Tass news agency that South Ossetian police were replacing Russian peacekeepers in Tskhinvali.
Major-General Vyachislav Borisov, a Russian commander near the town of Gori, said that Russian peacekeepers were replacing regular troops in the area around the Georgian town.