Speaking at a news conference in Berlin Merkel said: "I support what Mario Monti's government has put in place."
The reforms he has carried out have resulted in Italy winning back at least part of the confidence of the financial markets, she added.
"Therefore the Italian people will clearly vote to put Italy on a good path," Merkel said.
Stock markets sold off sharply and borrowing costs soared after a weekend of political drama in Italy in which Monti said he would soon step down and his mercurial predecessor Berlusconi announced a return to politics. Elections are now expected to be held in February.
Berlusconi on Tuesday set the tone for his upcoming election campaign accusing Monti of being "German-centric" and said that all the main economic indicators had worsened since the former Eurocrat was installed in power.
Speaking in Berlin before leaving for a meeting in Morocco on the Syrian crisis, Foreign Minister Guido Westerwelle hit back, saying it was unacceptable for Germany to be used as a target in a "popularist election campaign."
"Neither Germany nor Europe is to blame for the difficulties in Italy. On the contrary, Germany has always been a great help in overcoming the problems," he added.
Monti's reforms are "of great importance for the stability of Italy but also for the stability of Europe," stressed the minister.
Conversely, if the reforms were to be wound back, "it would be not only a sad development for Italy, it would be a dangerous development for Europe," insisted Westerwelle.
Monti has been credited with pushing through much needed economic reforms in Italy and markets rewarded him by pushing down borrowing costs that at one point were so high a bailout looked likely.
Heavily-indebted Italy has the eurozone's fourth biggest economy and severe financial problems there would represent a fresh chapter in the 17-nation bloc's ongoing debt crisis.
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The European Central Bank also warned on Monday that any new Italian leader must continue reform efforts.