Merkel said on Tuesday the pope's move could not be allowed to pass "without consequences" and called on the Vatican to "clarify unambiguously that there can be no denial" that the Nazis killed six million Jews.
Apparently aware of the growing outrage in Germany directed at the Bavarian pontiff, the Vatican on Wednesday called on the bishop – British-born Richard Williamson – to distance himself "unequivocally" from his claims the Nazi gas chambers never existed and that only 200,000 to 300,000 Jews had been killed in the Nazi concentration camps.
Merkel's unusual decision to become embroiled in the row prompted warm praise from Jewish groups, the media and even some bishops in Germany.
Stephan Kramer, general-secretary of the German Jewish Council, said the issue goes beyond religion.
"This underlines one more time she is very sensitive about it but it underlines also ... that the issue is no longer just an internal Catholic or an internal religious issue. This goes well beyond this," Kramer said in an interview with news agency AFP.
In an opinion article in for The Local this week, Kramer denounced the papal decision to rehabilitate Williamson a "scandal" that was more than just a simple misunderstanding.
"There should be no place in the Catholic Church for members of the clergy seeking to play down “Final Solution” or even question that it ever took place," Kramer wrote.
Merkel also won widespread praise in the German press.
Her comments were "an unusual, even spectacular political intervention in the pope's core business," wrote the left-wing Tageszeitung daily. "And – it was necessary."
The Munich-based Süddeutsche Zeitung said in an editorial: "Angela Merkel, the Christian Democratic chancellor, is right. We need a crystal-clear explanation from Rome. Disappointment with this pope is growing."
Sensationalist daily Bild blamed not the pope himself, but whomever advised him to lift Williamson's excommunication. "Holy Father. I prayed for you yesterday in my favourite church ... I have no grudge against you or against God. But I also prayed that God punish all your staff."
Even some Catholic leaders in Germany, where denying the Holocaust took place is illegal, also backed Merkel.
Bishop Georg Sterzinsky told Bild that "denying the Holocaust is monstrous and a strain on relations with the Jewish community."
The decision to lift Williamson's excommunication is "an action I do not think was correct. It must be put right," Sterzinsky said, adding if the Vatican has made a mistake, it should apologise, he added.
However, Benedict was not without his defenders in Germany, including his brother, Georg Ratzinger, also a priest.
"He doesn't need me to defend him. But it does annoy me how stupid and ill-informed several people are that are attacking him," he said in an interview to appear in Thursday's edition of the Leipziger Volkszeitung.
Others leapt even more vigorously to his defence. Another German bishop, Gregor Maria Hanke, was quoted by German newsmagazine Focus as saying Merkel's lashing-out at the pope was "incomprehensible and outrageous."
And Augsburg's Bishop Walter Mixa – no stranger to controversy himself after referring to women as "birthing machines" a few years ago – accused Merkel of a "political and diplomatic mistake" and said the pope "didn't need any extra lessons from the German leader."