Israel has so far resisted calls from Barack Obama, the US president, to stop building settlements in the occupied territories in order to enable peace talks between Israelis and Palestinians to resume.
Netanyahu has pledged not to build any new settlements, but wants to allow what he calls the "natural growth" of existing enclaves.
Following talks with Merkel, Netanyahu said he would restart talks with Palestinians, but made no comment on settlements.
"I hope that in a timeframe of a month or two we can relaunch negotiations," he said.
"Let's just get on with it. We have a big job to fend off the radicals and move forward."
The two leaders were also believed to have discussed reported attempts by Germany to mediate on an Israeli prisoner swap with Hamas.
The bid aims at the possible swap of hundreds of Palestinian prisoners in exchange for Israeli soldier Gilad Shalit, who has been held since his capture by Palestinian fighters in June 2006.
Netanyahu earlier called for for "crippling sanctions" against Iran to stop its disputed nuclear programme.
|Netanyahu held talks with Mitchell amid tension between the two sides over settlements [AFP]
"I think the most important thing that can be put in place is what the US secretary of state [Hillary Clinton] called crippling sanctions," he said.
"It is possible to put real pressure, real economic pressure, on this regime if the major powers of the world unite."
According to some media reports, Mitchell's talks with Netanyahu in London on Wednesday had been expected to include the offer of a tougher US line on Iran's nuclear programme in return for Israel partially freezing settlement building.
Both described the four-hour discussion as "very productive", but did not elaborate on any measures they may have agreed to.
An Israeli delegation is due to meet Mitchell next week in the US to continue the talks.
Speaking to Al Jazeera, Abdel Bari Atwan, editor-in-chief of the London-based Al-Quds Al-Arabi newspaper, said: "It seems Netanyahu is on a completely different planet, he is trying to divert attention from the settlements to Iran.
"He is asking the West to impose crippling sanctions against Iran. He would like everybody to concentrate on the Iranian nuclear programme and give priority to it.
"This is a clear-cut play from his side. He never mentioned the question of settlements in his press conferences in London or Germany. He is ignoring the question."
Settlements in the West Bank, which Palestinians want for a future state, are home to 300,000 Israelis, and around 2.5 million Palestinians.