"We haven't made the necessary progress" on Greece during the finance ministers' meeting earlier in the day and "in some places we've actually fallen back," Merkel told reporters as she arrived in Brussels.
"It's very important that Greece continue to work with the three institutions and that the finance ministers decide. The European Council [of heads of government] won't get involved in the negotiations."
Merkel and other EU leaders are meeting on Thursday for a summit slated to address refugee policy, the future of the trading and currency union and the demands of the UK for reform.
Greece's troubles are not on the agenda, but are certain to come up in the discussions.
Turning to address the refugee crisis in Europe, Merkel said that "we must remember the extraordinary summit we held" days after hundreds drowned off the Libyan coast in April.
"We've made progress in our collective efforts too, but now it's about finding sustainable, long-term solutions, that means more solidarity among the [EU] member states, that means decisive fighting of the causes," the Chancellor said.
"There are serious tensions emerging between the different countries - we can't afford that in Europe," she added.
Schäuble warns deal slipping away
Finance Minister Wolfgang Schäuble warned earlier on Thursday that the Greek government and its European creditors were moving apart as he arrived for yet another round of talks in Brussels.
“There is rather a larger difference than a rapprochement,” Schäuble told reporters as he arrived at a finance ministers' meeting held in advance of the leaders' summit.
Greece's creditors, the European Commission, International Monetary Fund (IMF) and European Central Bank (ECB), have not accepted a fresh batch of Greek proposals for cutting government spending and reforming the country's economy, instead offering their own set of suggestions.
Now the finance ministers must decide which document will form the basis for the leaders' discussions later, Brussels diplomats said.
If Greece does not receive a final tranche of €7.2 billion in emergency loans, the government will be unable to repay a loan installment to the IMF at the end of June and will be officially bankrupt.
There is a chance that leaders of eurozone member countries may be called out of the summit for a separate meeting about Greece's future in the single currency.
Greece's left-wing Syriza government has “not moved, or rather moved backwards, and therefore I'm not very optimistic for our session today,” Schäuble said.
A previous meeting of the finance ministers on Wednesday produced no result.
Prime Minister David Cameron has promised the British public a vote on whether the UK should remain a part of the EU and has been touring Europe hoping to win allies – including during this week's royal visit to Germany by Queen Elizabeth II.
But a note of optimism was struck by European Parliament president Martin Schulz.
“I have complete confidence that we can bring about an agreement,” the Social Democratic Party (SPD) politician said.