Armed pro-Russian militia at a checkpoint in the Donetsk area of Ukraine. Photo: DPA
"Given the absence of progress, we have to think about - and not just think about, but act on - the option of new sanctions," Merkel said.
"For this purpose, European Union foreign ministers will meet as soon as possible."
Aside from pushing on with diplomatic efforts with Moscow, she said, "we will have to act, and I think this will be a common European action, and a joint action of the G7 states."
She was speaking after a phone call Friday with Russian President Vladimir Putin in the morning, followed by a conference call she and other European leaders held with US President Barack Obama, and with visiting Polish Prime Minister Donald Tusk at her side.
Germany's foreign minister warned on Friday time was running out to end the "madness" in Ukraine
, where tensions are soaring in what Kiev says is a Russian bid to trigger a "third world war".
Frank-Walter Steinmeier was on a trip to Tunisia with his French counterpart Laurent Fabius, and both called for a "de-escalation" of a crisis that has seen Ukraine's army launch a major offensive to dislodge pro-Moscow gunmen.
"There is not much time to end this madness," Steinmeier warned at a news conference in Tunis, shortly after Ukraine's interim prime minister accused Russia of seeking to trigger a "third world war".
"All sides must come back to their senses," he said, pointing to those "in conflict within Ukraine and those who support them from outside."
Kiev and Washington accuse Moscow of backing the pro-Russian insurgents - a charge the Kremlin flatly denies.
Fabius, meanwhile, said Paris and Berlin were making a joint call for a "de-escalation" of the crisis.
Russia, Ukraine, the United States and European Union last week signed a deal meant to ease tensions in the former Soviet republic.
But a week on, this deal has all but failed as pro-Russian militants continue to occupy key buildings in the southeast of Ukraine and tensions soar sky high.
The rebels staged a brazen attack Friday on a Ukrainian military helicopter on the tarmac in the east, blowing it up with a rocket-propelled grenade. The pilot was wounded.
Kiev meanwhile announced its forces were seeking to "blockade" rebels inside the flashpoint town of Slavyansk to prevent more militants arriving, a day after its commandos made a brief incursion into the town, killing a 22-year-old insurgent.
Russia has responded by ordering its troops massed on Ukraine's border to launch a new military exercise.
The tense situation has triggered an increasingly strident war of words between Russia and the United States, amid concerns it could evolve into outright war.
Merkel and Putin talk
Also on Friday Chancellor Angela Merkel phoned Russian President Vladimir Putin to voice her "great concern" over the tense situation in eastern Ukraine, her spokesman said.
"In the phone call she expressed her great concern over the tense situation in eastern Ukraine and said she expects Russia's government to express its commitment to the Geneva agreement and to cooperate in its implementation," said spokesman Steffen Seibert.
Seibert said "Russia should publicly declare that it fully supports the Geneva declaration and it should publicly call on the armed pro-Russian groups in Ukraine to refrain from violence and lay down their arms".
The spokesman stressed that so far Russia's position since the Geneva deal had been "absolutely disappointing" and that "we can see no progress whatsoever".
His comments echoed an earlier sharp rebuke to Moscow by US Secretary of State John Kerry and came as US President Barack Obama was to speak to European leaders including Merkel in a conference call.
Seibert, speaking at a Berlin press conference, said that "sanctions are already in place" against Russia and that "you have to face the facts – in case nothing changes, it is important to be prepared for more" sanctions.
Moscow confirmed the phone call but threw the blame for the crisis at the Ukrainian government, which it accused of "unwillingness to implement the Geneva agreements."
"Vladimir Putin sharply condemned attempts by the Kiev regime to use armed forces against peaceful civilians in the southeast of the country," the Kremlin said in a statement.
The Kremlin said Putin and Merkel had also discussed Russian gas shipments, a crucial source of energy for Ukraine and much of Europe.
"The leaders of both countries stressed it was important to conduct as soon as possible talks on issues relating to the security of supplies and transit of Russian gas involving representatives of Russia, the European Union and Ukraine," it said.
White House visit
Merkel will also visit US President Barack Obama next week to discuss international security and trade, Berlin said on Friday.
"What now worries all of us, the very serious situation in eastern Ukraine, will be a central focus, as well as how to react to it," said Merkel's spokesman Steffen Seibert, also citing transatlantic economic and trade issues.
Merkel is set to arrive Thursday and meet Obama Friday at the White House, where they will give a joint press conference before having lunch together.
Merkel will also address the US Chamber of Commerce, focusing on a planned trans-Atlantic free trade pact, and meet IMF chief Christine Lagarde and US senators.
Berlin-Washington ties were hit last year by revelations from fugitive intelligence contractor Edward Snowden of widespread overseas surveillance by the US National Security Agency, including of Merkel's mobile phone.
Seibert said that - although Berlin last year pressed for a pact with Washington to commit both sides not to spy on each other - "concrete results" are not expected during Merkel's visit.
Obama in 2011 honoured Merkel with a White House state dinner, and she repaid his hospitality by welcoming him last year to Berlin for a long awaited visit, when he delivered a speech before the Brandenburg Gate.
The US president in January invited Merkel back to Washington, hoping to mend fences after the row over US eavesdropping.
Washington never confirmed the eavesdropping, but it implicitly gave credence to the reports by the careful formulation of its response to questions from reporters.