US President Barack Obama joined expressions of concern about how a debt crisis which began in Greece might affect economies across Europe and beyond, tempering optimism that the financial rescue for Athens might be much bigger than expected.
The euro fell to a year low and European stocks slid after Standard & Poor's cut Spain's credit rating.
Merkel, who has long held doubts about bailing out Athens due to strong opposition among German voters, expressed impatience about the pace of talks on the rescue.
"It's quite clear that the negotiations between the Greek government, the European Commission and the International Monetary Fund must be accelerated," she said in Berlin at a joint news conference with IMF chief Dominique Strauss-Kahn.
In European terms, Greece's economy is small and its financial problems are relatively modest. But politicians fear the crisis could spread to other economies, some of which are far larger and would be much more costly to help.
Shortly after Merkel spoke, the Standard and Poor's agency downgraded Spain's ratings to AA from AA+, with a negative outlook, saying it expected the euro zone's fourth biggest economy to grow only slowly in the next few years.
Anxiety has spread well beyond the borders of Europe. The White House said Obama was worried about Greece's debt problems and his administration was in touch with Europe.
"This is something that is of great concern to the president and we're monitoring it very closely," spokesman Bill Burton told reporters on Air Force One. The US Treasury Department and other agencies were "in close contact with folks in Europe about the issue," he added.
Europe has a series of weak links, governments which are running huge budget deficits due to recession in the past two years and now have to borrow heavily to plug the gap.
Beyond Greece lie relatively small Portugal and Ireland, but then comes Spain and possibly even Italy - the third biggest economy to use the common currency. All these need investors to remain confident in their ability to repay their debts.
"Contagion remains the paramount concern," said Marco Annunziata, chief economist at Italian bank Unicredit in London, adding that S&P was "on a roll" of debt downgrades.
"This unfortunately may reinforce concerns that volatility could intensify beyond Greece and Portugal and affect more significantly Spain and possibly Italy," he said. However, he said he did not expect a downgrade for Rome.
Standard and Poor's slashed Greek debt to junk status on Tuesday and also downgraded Portugal, raising concerns the crisis may engulf other heavily indebted EU states.
Greece faces significant debt repayments next month but economists said negotiators need to move much faster. "The longer they take to come up with a concrete action, the worse this situation will get," said Martin Schwerdtfeger at Toronto-Dominion Bank in Canada.
Earlier in the day German politician Juergen Trittin, a parliamentary leader for the Greens, offered a glimmer of hope after meeting the IMF chief in Berlin.
Trittin quoted Strauss-Kahn as saying the eventual package for Greece would be worth 100-120 billion euros ($133-160 billion) over three years, against just 45 billion pledged for this year by the IMF and euro zone governments.
Germany has been reluctant to help Greece and Strauss-Kahn declined to comment on the figure, saying it was too soon to give details as the rescue package was not yet finalized.
But markets rebounded on expectations that the aid will be much bigger than originally envisaged.
The euro lifted off a year low against the dollar hit earlier on Wednesday, and the Greek/German 10-year government bond yield spread was at 792 basis points, off an earlier record above 1,000 basis points.
Merkel's party risks defeat in a regional election on May 9 and has faced fierce pressure to cast Greece adrift, despite warnings that could lead to market mayhem.
A Reuters poll on Wednesday showed that financial analysts saw a roughly one in three chance of Greece restructuring its debt some time in the next five years, and an approximately one in 10 chance of it leaving the euro zone.
Greece's securities regulator banned short-selling in shares on the Athens bourse until June 28 after investors responding to the deepening debt crisis ditched Greek assets.
In Athens on Tuesday, about 1,500 private and public sector workers, students and anarchists marched to Parliament chanting "Out with the IMF and the European Union" in protest against austerity measures that could accompany the bailout.
