Speaking in the German parliament ahead of next week's G8 meeting in the Italian city of L'Aquila, Merkel said: "The summit in L'Aquila will make clear that this G8 format is no longer sufficient."
"We are seeing that the world is growing together and that the problems that we face cannot be solved by the industrialised countries alone," she added.
While the G8 still has a role to play in debating solutions to global problems, decisions should be taken in the Group of 20, which includes fast-growing nations such as China and Brazil, she said.
"I think the G20 should be the format that ... takes decisions on the future," she said.
Merkel also likened events in Iran to the oppression at the hands of the Stasi secret police in communist East Germany, where she grew up.
"I know from the time of the GDR (East Germany) how important it was that people around the world made sure that the people stuck in (Stasi prisons) Bautzen and Hohenschoenhausen ... were not forgotten," Merkel told parliament.
"Iran must know, particularly in the age of modern communications, that we will do everything in our power to ensure that these people (arrested in Iran during the recent turmoil) are not forgotten about," she said.
Merkel called for a "strong message" to go to Iran from the G8.
"We have become witnesses to sensational and above all shocking events, and I hope that a strong message of unity emerges out the (G8) summit, unity that demonstrations, civil rights and human rights are indivisible, and that this also applies to Iran," Merkel said.
The first day of the summit will be restricted to leaders from the traditional G8 - Britain, Canada, France, Germany, Italy, Japan, Russia and the United States.
Discussions will then be broadened out to include the largest emerging economies - India, China, Brazil, Mexico and South Africa.
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African leaders have also been invited, as well as heads from the so-called Major Economies Forum, including Australia and South Korea.
Leaders will discuss the international financial crisis and aim to sign off on measures designed to prevent such a meltdown happening in the future.
Also high on the agenda is climate change ahead of December's crunch environment meeting in Copenhagen, as well as international hotspots such as Iran and Afghanistan.