Alexander Gauland, of the anti-immigration Alternative for Germany (AfD) party, told a rally outside Berlin that Merkel's liberal asylum policy was radically transforming the face of the country, the Frankfurter Allgemeine Sonntagszeitung said.
The remarks could later be seen in a video posted on YouTube from the rally in the town of Elsterwerda Thursday.
Gauland, 75, is seen twice reading from a sign held by a member of the crowd: “Today we are tolerant and tomorrow foreign in our own country,” a far-right slogan used by the neo-Nazi NPD party.
The hardline deputy AfD leader drew widespread condemnation late last month by saying most Germans would not want footballer Jerome Boateng, whose father is Ghanaian, as a neighbour — a comment Merkel's spokesman slammed as “vile and sad”.
Gauland followed up Friday by saying the national team is “no longer… German in the classical sense”.
The three-year-old AfD has assumed an increasingly anti-immigrant and Islamophobic stance as Europe's biggest economy let in nearly 1.1 million asylum seekers last year.
It is currently polling at about 15 percent nationwide after capturing seats in three state elections in March.
Analysts say it has tapped into angst over the migrant influx, which has slowed significantly in recent months, and bitter infighting in Merkel's ruling conservative bloc.
Addressing the open dispute over asylum policy, Horst Seehofer, the head of the Christian Social Union, the Bavarian sister party to Merkel's Christian Democrats, pledged Sunday to try to bury the hatchet.
“The chancellor and I have again created a basis of trust that we can build on,” he told Bild am Sonntag newspaper.