Merkel told reporters on Monday that spying among friends "should not happen", but emphasized the importance of cooperating with the US National Security Agency (NSA) to fight against terrorist threats.
"We've got controls on the BND in parliament and I consider that to be absolutely essential," Merkel said.
"But on the other hand, intelligence agencies are working to ensure the public's safety and the German government will make every effort to ensure the proper functioning of the intelligence services.
"This ability to work properly can only happen in cooperation with other intelligence services in the face of international terrorist threats," including working with the NSA, she said.
Merkel added that there is "an innate tension" between freedom and security.
"Striking the right balance is my job," she said.
Politicians within her own coalition government criticized Merkel on Monday, stating that the chancellor should come forward about what her administration knew.
"The Chancellor can no longer afford to play the game of distancing herself from the latest findings and saying she had nothing to do with it." Social Democratic Party (SPD) deputy chairman Ralf Stegner told the Süddeutsche Zeitung.
"She has to explain, and the current chief of staff of the Chancellor's office as well as his predecessors should stand before the Bundestag's NSA investigative committee as soon as possible."
Stegner's comments, coming from a significant member of the coalition government's junior party, signify the growing pressure the Chancellor faces in a controversy that has highlighted Germany's complicated relationship with American intelligence agencies.
In April it was revealed that Germany's foreign intelligence agency (BND) spied on friendly European nations on behalf of the NSA, the United States' largest intelligence agency.
Last week further reports were published showing that the BND helped the NSA carry out "political espionage" by surveilling "top officials at the French Foreign Ministry, the Elysee Palace and European Commission".
Politcians from the opposition also ratcheted up the pressure on the Chancellor.
Konstantin Von Notz, Green Party MP and head of the NSA investigative committee, wants to see the lists of controversial search requests targeting European officials that were allegedly deleted by the BND.
"Chancellor Merkel promised to clear things up. Until now these lists aren't there. Whoever isn't presenting these lists isn't clearing things up but covering them up," he told Tagesschau.
"Mrs Merkel has let this scandal slide, but now she is on our list for the investigative committee and will have to speak the truth" he added.
"She has to speak, and that means under oath. The same goes for her chief of staff. Now we have to know," said head of Die Linke (The Left Party) Gregor Gysi on TV news show Bericht aus Berlin.
Former chief of staff and current interior minister Thomas de Maiziere will speak in front of a closed session of the parliamentary committee for the oversight of the intelligence services on Wednesday.
"I regret that I can't speak publicly on the basis of highly secret material, because then a tricky situation in the public discussion arises. It will be cleared up by statements to the committee," he said.
The government has been accused of lying to the Bundestag after it emerged last week that Chancellor Angela Merkel's office knew German spies were conducting economic espionage on behalf of the Americans.
Committee chairman Andre Hahn said: "The government only admits what it can no longer deny".
"It's no longer acceptable for parliament to be fobbed off with half information. That isn’t how you should deal with representatives of the people," he said.
The NSA investigation committee meets on Thursday.