Speaking on the eve of a crucial Brussels summit, Merkel made clear the EU would stand firm on civil rights in Turkey and that Ankara's bid to eventually join the 28-nation club is "not on the agenda now".
Europe, divided and desperate to end its biggest refugee influx since World War II, is pinning its hopes on a deal with Turkish President Recep Tayyip Erdogan.
Under the plan hailed as a "game-changer", Turkey would seek to stop refugees' dangerous sea journeys and take back illegal migrants from Greece. For each Syrian it accepts, it would send one to the EU in a more orderly redistribution programme.
Many critics have voiced unease over human rights concerns in any deal with Turkey, over its arrests of journalists and academics and an intensifying military campaign against Kurdish separatists.
France has warned against attempts by Turkey to strongarm Europe, and Czech President Milos Zeman charged that Ankara's request for billions of euros more in EU aid amounted to "blackmail".
Merkel, addressing the concerns in a speech to parliament, stressed that no shortcuts would be taken.
But she also reached out to Turkey, saying she could understand its request for more EU financial aid.
"What Turkey has done for ... Some 2.7 million refugees can't be praised highly enough," she said.
"Europe has not covered itself with glory in how, as a union of 28 members states with 500 million citizens, it has struggled with fairly sharing the burden."
Sounding a hopeful note, Merkel said the EU summit may "reach an agreement that could give us, for the first time, a real chance at a sustainable and pan-European solution to the refugee crisis."
