Accompanied by Prime Minister Ehud Olmert and several Israeli ministers, a sombre-faced Merkel turned up the eternal flame in the Hall of Remembrance at the Yad Vashem memorial before laying a wreath and pausing for several seconds in silence.
Dressed in a black suit, the 53-year-old German chancellor then visited the Children's Memorial and signed the guestbook at the end of her third visit to the memorial since taking office.
"In view of Germany's responsibility for the Shoah (Holocaust), the German government...underlines its determination to build a future together," she said.
Merkel then headed to Olmert's office to attend a first-ever joint Israeli-German ministerial meeting with seven German ministers who are accompanying Merkel to Israel.
Several Israeli ministers, including the foreign, defence, justice and finance ministers, will also hold separate talks with their German counterparts aimed at tightening cooperation between the two states.
On Sunday, Merkel visited the grave and home of Israel's founder and first prime minister David Ben Gurion at the Sde Boker kibbutz in the heart of the Negev desert in the south of the country.
"Sixty years after the creation of Israel we affirm again the special responsibility of Germany towards Israel," Merkel said at a lavish welcoming ceremony at Tel Aviv's Ben Gurion airport.
"But there is not only the responsibility for the past but projects for a better future," she added.
Welcoming Merkel, Olmert said her Middle East policies were "characterized by basic support for Israel and courage and determination about everything related to the fight against terror".
On Tuesday, Merkel will become the first German chancellor to address the Israeli parliament, the Knesset, an honour normally reserved for heads of state.
Her three-day visit is designed to mark the 60th anniversary of the creation of Israel, which will be officially celebrated in May.
Merkel said she wanted "to show our responsibility for the past - the horrors of the Shoah - and demonstrate clearly that Israel's right to existence is a constant in German foreign policy".
More than 60 years since the Holocaust, in which the Nazis killed six million Jews, Germany is Israel's most important political and trading partner in Europe.
Merkel's visit is focused on bilateral ties and the conflict with the Palestinians was not expected to be a major topic of conversation, but on Sunday the chancellor reaffirmed her support for the peace process.
Berlin announced last week that it will host an international conference in June on ways to help the Palestinians prepare for statehood.
With Holocaust survivors still alive in Israel, the 53-year-old German chancellor can not expect to be welcomed with open arms by everyone, and her intention to address the Knesset in German has ruffled some feathers.