"I personally understand what the division of one's country means," said Merkel, who was born in the former East Germany before her country's reunification in 1990, after talks with Cypriot President Demetris Christofias.
She pointed to "similarities but also many differences" between the two countries and said the key remained in the hands of the rival Greek- and Turkish-Cypriot communities.
"The way must be found by the people of Cyprus themselves," the German chancellor told a joint news conference, while pledging the support of Germany, which took up a seat on the UN Security Council at the start of the year.
She praised Christofias's efforts and said Berlin would use its influence and experience to help Cyprus reach a settlement and to promote greater cooperation between the EU and NATO, complicated by the division of Cyprus.
Christofias, the Greek Cypriot leader whose country takes on the rotating EU presidency next year, charged that Turkey was making little efforts to find a settlement and harassing oil exploration off the south coast.
"As regards Turkey's (EU) accession process, we explained that our support is not unconditional," he said. "The actions and attitude of Turkey show anything but an interest to reach a solution right now."
The president said oil exploration was being "harassed from the air and sea," accusing Turkey of "gunboat diplomacy."
The five-hour visit by Merkel came on the eve of a resumption of UN-brokered peace talks between Christofias and Turkish Cypriot leader Dervis Eroglu.
On Monday, UN chief Ban Ki-moon's special adviser on Cyprus, Alexander Downer, spoke of a "very positive atmosphere" in the negotiations and said the two leaders had been making steady progress.
Merkel was also to visit the Goethe Institute in the UN-patrolled buffer zone, and to meet UN chief of mission Lisa Buttenheim and main right-wing Disy opposition leader, Nicos Anastasiades.
Christofias has said Merkel's brief visit was on a par with the landmark visits of Russian President Dmitry Medvedev and Pope Benedict XVI who arrived in Cyprus to much fanfare last year.
Both the Cypriot government and media have described her visit as "historically important" and "politically significant".
The latest peace process was launched amid renewed international optimism in September 2008. But with no obvious signs of tangible progress, Ban has stepped in to try to add impetus.
The trio are expected to meet again in Geneva on January 26 after a review last November in New York of the sluggish peace process.
Cyprus has been divided since 1974 when Turkey invaded and seized its northern third in response to an Athens-engineered coup in Nicosia to unite the island with Greece.