After the talks, the German Chancellor stressed the need for the agreed Ukraine ceasefire to be respected.
“Every day we get OSCE reports that explain quite objectively why this ceasefire isn't observed," she said through a translator, noting there are widespread violations on the part of the pro-Russian separatists.
"This process is very complex, we hoped that ceasefire would be reached. Unfortunately that did not happen."
In February, Merkel and French President François Hollande helped broker a peace deal for Ukraine in a last-ditch effort to stop months of fighting between pro-Russian separatists and Kiev forces.
But Kiev and the insurgents accuse each other of continuing to violate the ceasefire deal despite claims that they have withdrawn heavy weapons from the frontline in accordance with the agreement.
Merkel said the humanitarian situation remained dire, noting that a prisoner exchange was not yet complete.
Putin said that he and Merkel did not see eye to eye on the Ukraine crisis but pointed to an improvement on the ground.
"Despite all the problems in eastern Ukraine it has become calmer."
The Ukraine conflict has so far killed more than 6,100 people and displaced a million more.
Prior to the talks, Merkel lay down a wreath at the grave of the Unknown Soldier near the Kremlin walls in an apparent compromise gesture after having skipped Russia's main festivities a day earlier and which marked the 70th anniversary of the former Soviet Union’s victory over Nazi Germany in WWII.
One of the highlights was Saturday’s huge military parade, but most Western countries boycotted it because of Moscow's annexation of Crimea a year ago and its alleged support for Ukraine’s pro-Russian separatists.
Political analyst Lilia Shevtsova said Sunday's meeting between Putin and Merkel was highly symbolic.
"They are hardly happy to see each other," the prominent pro-Westernanalyst wrote on Facebook.
"He is trying to retain his seat at the table by turning to the shadows of the past and other people's glory."
"But she has not accepted his rules of the game having arrived to pay tribute to the people who won."
'Everyone is here'
Many are concerned that Putin is using WWII festivities to justify Russia's meddling in Ukraine and promote his nationalism-tinged agenda.
Putin shrugged off the Western snub and instead played up ties with Asia,Latin America and Africa.
"Everyone we wanted to see was here," he said in televised remarks Saturday evening.
Just before meeting Merkel, Putin hosted 91-year-old Zimbabwean President Robert Mugabe, who praised him for standing up to Washington and noted that their two countries had been slapped with sanctions.
"That is the reason why we should remain together," Mugabe said.
But Putin also signalled his willingness to mend ties with Europe when he hosted Czech President Milos Zeman, one of the few European leaders to fly to Moscow for the festivities.
"It was not us who initiated the chill in relations with Europe but I hope that thanks to politicians like you we will manage not only to revive them completely but to also move forward," Putin said on Saturday.
The Czech leader said he was confident that "normalties will replace the chill."
Like Putin, many Russians shrugged off the Western no-show as they celebrated Victory Day well into the night, singing war-era songs and feting veterans.
Some 500,000 people marched through central Moscow with portraits of their relatives who fought in the war, in the biggest march of Putin's 15-year rule.
The 62-year-old strongman wowed Russians by unexpectedly joining the huge procession on Red Square.