The battle in northeast France was the longest of World War I, lasting 300 days, and claimed more than 300,000 lives before France emerged victorious.
“The name Verdun is a symbol of the unimaginable atrocity and the absurdity of war, but also of Franco-German reconciliation,” Merkel said in the speech at Verdun's town hall, a first for a German leader.
The chancellor said she recognised it was not “easy” for the people of the town that is forever marked by the fighting to give her such a “warm welcome”.
Hollande said: “Verdun is a town which represents both the worst — where Europe lost its way 100 years ago — and the best, because the town has been able… to unite for peace and Franco-German friendship.”
Both leaders are expected to make a call in speeches later for Europe to pull together to confront its current challenges.
Under persistent rain, Hollande and Merkel began the commemoration by laying a wreath at the German military cemetery at Consenvoye, just north of Verdun.
Sharing an umbrella, they walked between rows of black crosses embossed in white with the names of the dead that stretch down the hill of the cemetery where 11,000 German soldiers are buried.
By visiting the German cemetery, Hollande and Merkel were following in the footsteps of their predecessors Francois Mitterrand and Helmut Kohl.
When Mitterrand and Kohl joined hands there during the playing of the French national anthem in 1984, it underlined how close ties had become between two countries which were once enemies but are now often described as the twin motors of the European Union.
Hollande said before Sunday's ceremony that it was an opportune time for the leaders to spell out their ambitions for Europe, at a time when the continent was in the grip of the “evil of populism”.
That appeared to be a reference to Europe's far-right parties which have made advances in several countries, fuelled by growing concern over an unprecedented influx of migrants.
Over lunch, the two leaders will discuss the crisis caused by the hundreds of thousands of migrants and refugees seeking refuge in Europe and the June 23 referendum in Britain on whether or not to quit the EU.
They will then attend the main commemorative ceremony at the Douaumont ossuary, where the remains of 130,000 soldiers, French and German, are buried.
It was here that Mitterrand and Kohl made their symbolic gesture to reaffirm Franco-German friendship.
“Mitterrand's gesture with Helmut Kohl, the hands that reached out and found each other, that's the symbol of reconciliation,” Hollande told French radio this week.
Sunday's ceremony at Douaumont will feature more than 3,000 French and German schoolchildren in a presentation choreographed by the German filmmaker Volker Schloendorff.
Church bells for miles around will ring out in memory of the soldiers who died on both sides.
The battle of Verdun lasted from February 1916 to December 1916 and was fought along the front line dividing the French and German armies.
The last survivor of the battle died in 2008.