On Thursday, the US leader had delivered a much-anticipated speech in Egypt in which he vowed to forge a "new beginning" for Islam and America.
Merkel said: "With the new US administration and Obama, we have a unique opportunity to revive this ... [Middle East] peace process.
"Yesterday's speech in a way opened doors toward the Arab world."
Later, Obama and Merkel visited the former Buchenwald concentration camp, where an estimated 56,000 people were killed, to commemorate victims of the Holocaust.
The visit to Buchenwald holds personal significance for Obama as his great uncle helped liberate a satellite camp of Buchenwald created by the Nazis near Weimar.
The two leaders, along with Elie Wiesel, the Nobel laureate and Holocaust survivor, each laid a long-stemmed white rose on the ground at the camp.
Obama and Merkel are expected to discuss thorny issues such as Germany's commitment to the war in Afghanistan and possibly Berlin's reluctance to take inmates from the US military prison in Guantanamo Bay.
The president is also thought to be keen on hearing Merkel's views on Moscow, as Russia supplys much of Germany's energy.
But analysts warned against expecting too much in the way of political decisions from the talks.
After putting pressure over Israel on settlements in recent days, Obama also turned up the heat on Arab states in his Dresden comments.
He said: "What I'd like to see is indicators that they are willing, if Israel makes tough commitments, to also make some hard choices that will allow for an opening of commerce, diplomatic exchanges between Israel and its neighbours."
The president called on Palestinian leaders to do more to secure Israeli borders and to cut down on incitement of hatred against Israel.
"I think, to his credit, president Abbas has made progress on this issue, but not enough," Obama said.
'Holocaust and horror'
Later in the day, Obama will visit wounded US soldiers from Iraq and Afghanistan at the Landstuhl military hospital.
Following his visit to Germany, Obama will travel to France for talks with Nicolas Sarkozy, the French president.
On Saturday, he will join Sarkozy on the Normandy beaches to mark the 65th anniversary of the D-Day landings - a reminder to European states of the debt they owe the US.
In an interview in Germany's Leipziger Volkszeitung newspaper, Merkel said: "Buchenwald concentration camp, the battle fields of northern France and the destruction of Dresden stand for the terrible suffering which Germany wreaked on Europe through the Holocaust and horror of World War Two."
Locals in Dresden celebrated Obama's visit with an outdoor beer festival with balloons, US flags and a jazz band playing in front of a banner that read: "Welcome Mr President".