"We must do all we can to end this killing, for example by not allowing the dictator fresh money to hire foreign soldiers," Westerwelle told journalists during a special meeting of the UN Human Rights Council.
"We are working to cut financial flows," Westerwelle said following talks with US Secretary of State Hillary Clinton, British Foreign Secretary William Hague, Italian Foreign Minister Franco Frattini and French European Affairs Minister Laurent Wauquiez.
"The latest idea under discussion is to freeze all payments to Libya for 60 days," he said.
Germany, France and Italy are the main importers of oil from Libya.
Westerwelle welcomed what he called "the unity of the international community" in backing "clear, concrete and strong sanctions."
Speaking later at the Human Rights Council, the German foreign minister said he expected the EU to agree on "robust sanctions."
"These sanctions are not directed against the people of Libya. Any sanctions will only be levelled at those responsible for the violence. And sanctions will strike hard at those who are responsible," he pledged.
EU diplomatic chief Catherine Ashton said European Union countries would meet later Monday to implement sanctions against Tripoli.