Urging lawmakers to pass Germany's share of a new euro750 billion ($1 trillion) eurozone rescue package, Merkel said that defending the currency is "about no more and no less than the preservation of the European idea."
"That is our historic task; if the euro fails, then Europe fails," she told the lower house of parliament. "The euro is in danger — if we do not avert this danger, then the consequences for Europe are incalculable, and then the consequences beyond Europe are incalculable."
Merkel's warning followed Germany's decision Tuesday to ban so-called naked short-selling of eurozone government debt and shares of major financial companies in an attempt to ward off steep market drops.
Naked short-selling involves traders selling shares or investments they don't hold in hopes of buying them cheaper later.
The move from Germany — Europe's biggest economy and a forceful player within the European Union — move roiled financial markets, in part because it suggested to traders that policymakers were grasping at straws to stem the crisis of confidence over the ability of European governments to pay off their heavy debt amid slow growth.
Fears some governments may eventually fail to pay all they owe, or will have to cut back so severely that their economies sink into prolonged recessions, have weighed on stocks and raised concern over whether the 16-country eurozone might eventually break up.
The euro750 billion rescue package attempts to calm those fears by removing the possibility of imminent default, though it does little in itself to address the underlying debt issue.
Politicians have roundly condemned "speculators" for selling off government bonds, driving up their borrowing costs and making it even harder to keep their finances under control. But many analysts say the real problem is simply too much debt.
Still, Europe is showing a new-found resolve to strengthen its regulatory grip. On Tuesday, European Union governments agreed to tighten rules for hedge funds, so-far lightly regulated investment funds.
Citing the short-selling restriction, Merkel said Germany will act alone in areas where that causes "no damage," and said the ban would remain until wider European rules are drawn up.
The head of financial regulator BaFin, which imposed the ban, said it wasn't a sign of weakness in the German banking sector and suggested people hurt by the measure had circulated rumors that it was a crisis step — prompting the euro to drop.
Jochen Sanio told parliament's budget committee that the measure is directed only against "excessive short selling" which could endanger banks.
Germany, Europe's biggest economy, is to contribute at least euro123 billion in loan guarantees to the new rescue package. Parliament is expected to vote on Friday — just two weeks after approving a separate package for Greece, already unpopular at home.
In Paris, French Finance Minister Christine Lagarde said her country would provide loan guarantees of up to euro111 billion, with legislation going to parliament on May 31.
Merkel stressed that aid decisions will need unanimous approval from all involved and that, where credit is from other governments instead of a common European pot of money, "we decide ourselves on every use of the funds."
The head of Germany's central bank, the Bundesbank, called for approval this week of the package to calm markets. Axel Weber said access to rescue funds should only be possible if the financial stability of the whole eurozone is at stake.
While the root cause of the debt crisis was insufficiently competitive countries living above their means, Merkel said, markets poured oil on the fire.
"We are now seeing anew how, through a lack of limits and rules, purely profit-oriented behavior on the financial markets can be destructive," she added. "It is the task of politicians, parliaments and governments to intervene, to regulate, in case of doubt to ban in order to keep the risks controllable."
Merkel renewed a pledge to push for taxation of financial markets — either a financial transaction tax or another form of levy — in Europe and beyond. She also pushed for quick action to put ratings agencies under European supervision and increase transparency on derivatives markets.
The chancellor was unapologetic about pushing for debt-laden nations to be made to tackle their budget deficits.
"Europe needs a new culture of stability," she said, with faster and more effective punishment for countries that habitually run excessive deficits.
Those could include withholding European Union structural funds and temporarily withdrawing voting rights from repeat offenders, she said — adding that it was important to draw up procedures for an "orderly state insolvency."
Above all, though, Merkel said all EU members must speed up cutting their deficits.
"Only then can the rescue attempts be effective, because continuing to
cover up the real causes of the crisis wouldn't help Europe," she said.