"We should take another look at possibly listing certain people who are now in charge in eastern Ukraine after these illegitimate elections," she told reporters.
"We would like to lift the sanctions but that is not the situation as I see it," she said, reiterating elections on Sunday in pro-Russian, rebel-held areas were not in the spirit of a tattered truce agreement that was signed in Minsk in September.
Merkel said the ceasefire accord must be respected and pledged humanitarian aid for eastern Ukraine.
"We must do everything we can so that these people can simply survive the winter," Merkel said.
Pro-Russian separatists defied the Ukrainian government Sunday by holding leadership elections in the rebel-held east of the country that they described as legitimizing their two self-declared independent states.
Russia said it "respected" the rebel elections, but Kiev, the European Union and United States all said that the polls had badly damaged the peace process, which was based on giving rebel areas autonomy, not independence.
European Union sanctions, introduced progressively this year and coupled with similar measures by the United States, are meant to pressure Russia for backing the rebels and annexing Ukraine's Black Sea province of Crimea in March.