"On the one hand, we want to reach an agreement with the British government," Merkel told MPs in an address to the Bundestag (German parliament) on Wednesday.
"On the other hand, we will not put the fundamental achievements of European integration in question, in particular, the principles of freedom of movement and non-discrimination of European citizens," the Chancellor added.
"These principles are not up for debate," she said, on the eve of a summit when leaders of the 28-nation bloc are to discuss Britain's demands.
British Prime Minister David Cameron has cited curbing benefits for EU migrants as one of the key reforms he is seeking, before his country holds a referendum on whether to leave the EU.
Under his plan, EU migrants employed in Britain would only be able to claim welfare payments after four years.
Cameron says he will campaign to stay in the EU only if he gets a reform deal.
But he faces stiff resistance from other leaders, who view his proposals as discriminatory.