Speaking to a meeting of young members of her Christian Democrats (CDU), Merkel said allowing people of different cultural backgrounds to live side by side without integrating had not worked in a country that is home to some four million Muslims.
"This (multicultural) approach has failed, utterly failed," Merkel told the meeting in Potsdam, south of Berlin.
She said too little had been required of immigrants in the past and repeated her usual line that they should learn German in order to get by in school and have opportunities on the labor market.
The debate over foreigners in Germany has shifted since former central banker Thilo Sarrazin published a book accusing Muslim immigrants of lowering the intelligence of German society.
Sarrazin was censured for his views and dismissed from the Bundesbank, but his book proved highly popular and polls showed a majority of Germans agreed with the thrust of his arguments.
Merkel has tried to accommodate both sides of the debate, talking tough on integration but also telling Germans that they must accept that mosques have become part of their landscape.
She said on Saturday that the education of unemployed Germans should take priority over recruiting workers from abroad, while noting Germany could not get by without skilled foreign workers.
In a weekend newspaper interivew, her Labor Minister Ursula von der Leyen (CDU) raised the possibility of lowering barriers to entry for some foreign workers in order to fight the lack of skilled workers in Europe's largest economy.
"For a few years, more people have been leaving our country than entering it," she told the Frankfurter Allgemeine Sonntagszeitung. "Wherever it is possible, we must lower the entry hurdles for those who bring the country forward."
The German Chamber of Industry and Commerce (DIHK) says Germany lacks about 400,000 skilled workers.
Yet Horst Seehofer, chairman of the Christian Social Union (CSU), the CDU's sister party, has rejected any relaxation of immigration laws and said last week there was no room in Germany for more people from "alien cultures."