Merkel told reporters at a meeting of her Christian Democratic Union party that she would run again to "fight for our values and our way of life" but added that she expected strong challenges from both the right and the left of the political spectrum.
"This election will be more difficult than any before it, at least not since German reunification" in 1990, Merkel said, citing a strong "polarisation of our society".
The 62-year-old German leader said she had "endlessly" weighed her choice but that in "distinctly difficult, even insecure times", she saw it as her "duty" to stand again.
Citing the uncertainties created by the British vote to leave the European Union and the election of Donald Trump as US president, she said she understood the world was looking to her as a source of stability.
"I am indeed honoured but I also find it grotesque and even absurd" that some commentators have suggested she could lead the free world, Merkel said.
"My goal in politics is to work for the cohesion of our country," she said, adding she hoped for an election campaign "fought among democrats, in the tone of democrats".
Merkel, 62, has governed Europe's top economic power, which does not have term limits, since 2005.
Another full four-year mandate, which pollsters say she is likely to win, would tie the post-war record set by her mentor Helmut Kohl, who presided over the 1989 fall of the Berlin Wall.
She is the first woman, the youngest person and the only candidate who grew up in communist East Germany to lead the reunited country.