Ai, who was arrested on April 3, was released from prison Wednesday due to what the Chinese authorities called his "good behaviour", his willingness to admit to crimes related to tax evasion and to repay the money owed, China's official Xinhua news agency reported.
After helping design the centrepiece stadium of the 2008 Beijing Olympics, Ai had relentlessly criticised China's ruling Communist Party.
He an angered Beijing's political elite with his involvement in a number of sensitive activist campaigns.
Ai's release "can only be a first step," Merkel said in a statement released by her office.
"Now, the accusations that have been made against [him] must be explained in a transparent manner and in conformity with the rule of law," the statement further said.
Foreign Minister Guido Westerwelle said Ai's release was, “a great relief for the artist and his family,” but he also said that reported conditions of his release, against a bail payment, were depressing.
Amnesty International Germany's Asia expert Maja Liebing said although Ai's release was a positive step, it was only a small one. His arrest was illegal, “even according to Chinese laws,” she said. She suggested that the Chinese government wanted to improve its image somewhat ahead of Prime Minister Wen Jiabao's visit to Germany at the end of the month.
A reporter for Der Spiegel in Beijing said that Ai had appeared before reporters but had said little. “I am fine,” he told them, but would not say why he was remaining silent.
“I cannot say anything, please understand,” he said before returning inside his studio in Beijing.
The release of the outspoken activist, who was taken into custody in early April during the government's biggest crackdown on activists in years, came as a surprise, as Chinese authorities had suggested he was involved in massive tax fraud.
The detention of the burly avant-garde artist - whose work was on display at London's Tate Modern gallery this year - sparked an international outcry, with the United States and the European Union leading calls for his release.