The extra deployment will need approval by Germany's parliament.
Merkel said Berlin would begin to hand over responsibilities to the Afghan government this year, and that she wanted Germany's soldiers to start coming home in 2011, a target shared by Barack Obama, the US president.
Although the Chancellor did not put a fixed date for the complete withdrawal of Germany's troops, Guido Westerwelle, her foreign minister, said: "In the next four years we want to create the conditions to enable our military presence to be wound down gradually ... We want to begin this year, step by step."
German troops currently form the third-largest contingent in the 110,000-strong international force, behind the United States and Britain.
Merkel said Berlin woould provide $70m over five years to a $500m international fund proposed by Karzai to encourage fighters to lay down their guns with the lure of jobs and money.
In addition, she said Germany would almost double its development aid to $610m over 2010-2013, with the aim of giving three three million people "access to work," compared with 30 per cent at present.
Other goals include building 700km of roads, giving half of the population access to energy and clean drinking water, up from 22 per cent now, and schools for 60 per cent of boys and girls, versus a quarter at present.
Merkel said that the increased focus on training, which would be done by 1,400 German troops, up from just 280 at present, would involve more contact with the local population, but that this did not mean more danger to troops.
Asked how Germany's new commitments would be received by the US administration, which is pressing its allies to back its deployment of an extra 30,000 soldiers this year, Merkel said she had "nothing to be ashamed of".
| Karzai wants to offer incentives to Taliban fighters to lay down their weapons [AFP]
Obama has said he wants the additional troops to be matched by 10,000 more troops from other members of the Nato military alliance, swelling the foreign force to about 150,000 by the end of this year.
Merkel's comments came ahead of a two-day visit to Berlin starting late on Tuesday by Karzai, who is under pressure from his Western backers to tackle rampant corruption following his tainted re-election.
Earlier on Tuesday, Karzai met regional leaders for a security summit in Istanbul, Turkey.
The president held talks with Abdullah Gul, the Turkish president, Asif Ali Zardari, the Pakistani president and top officials from Iran, China, Tajikistan and Turkmenistan, who backed his plans to offer incentives to Taliban fighters.