Merkel told investigating lawmakers that she found out "from the media on September 19, 2015" about charges laid by Washington over the cheating against Europe's biggest carmaker the previous day.
A special commission of MPs is carrying out a probe into whether Merkel and her government colluded with VW to shield the group from regulators despite knowing that it was carrying out a scam.
Volkswagen - which owns 12 brands including Porsche, Audi and Skoda - stunned the world when it admitted to fitting 11 million diesel vehicles worldwide with software that temporarily reduces harmful emissions during regulatory tests.
The scandal, the biggest to hit post-war Germany's business world and one of its vital industries, has not only sunk the company into billions of losses but also tarnished its reputation.
Merkel said she was subsequently briefed by Transport Minister Alexander Dobrindt on the details of the scandal and that she backed his ministry in carrying out an internal probe into the matter.
"I encouraged him to do everything to bring to light things that were not already known," she said.
Deep ties with car industry
Tasked with investigating Berlin's response to emissions excesses going back to 2007, the parliamentary commission has already heard witnesses from across the government and Volkswagen, including the car group's former chief executive Martin Winterkorn.
Merkel has been chancellor for the entire period covered by the inquiry, which has also heard serving and former ministers including Sigmar Gabriel, who previously served as economy minister, and chancellery chief of staff Peter Altmaier.
German politicians have long nurtured the nation's auto makers, one of the country's strongest industrial sectors, and an employer of some 800,000 people.
Merkel has been taken to task by environmental groups for lobbying in favour of the car industry for lower pollution thresholds at the EU.
At home, Volkswagen's deep links with the Social Democrat led Lower Saxony state government, a major shareholder with seats on the firm's board and ties to its powerful works council, have often been criticized.
The VW scandal has therefore raised questions on whether such feather bedding extended to turning a blind eye to much higher emissions of harmful nitrogen oxides than allowed.
No improper conduct uncovered
The hearings have yet to uncover clear evidence that Merkel or her government acted improperly.
Her appearance before the emissions committee is Merkel's second as a witness this year, coming less than a month after she deflected MPs' questions about mass spying by Germany's BND foreign intelligence service on behalf of the US National Security Agency.
One of the top questions that the inquiry is seeking to address is why the diesel cheating was uncovered by officials in the United States, rather than by Germany's own KBA motor vehicle authority.
California's powerful Air Resources Board (CARB) was one of the first regulators to bring the VW scandal to light, along with the US Environmental Protection Agency.
Dobrindt - whose brief includes oversight of the KBA - told the inquiry in his own testimony that the regulator "acted faster than others" in responding to the scandal.
MPs were also curious to hear from Merkel about a conversation she had with then-California governor Arnold Schwarzenegger in 2010, after CARB chief Mary Nichols told the inquiry the German leader had criticised the US state's strict regulations on diesel vehicles.
Nichols told the inquiry Monday she was "surprised" that a head of government was informed in such detail about the topic, according to a summary of her testimony published on the Bundestag (German parliament) website.
Reacting to Nichols' statement, Merkel said it "could be because of my time as environment minister".
Former VW CEO Winterkorn told the inquiry he spoke of 'dieselgate' with Merkel in a phone call on September 22, 2015 - just after Winterkorn himself claims to have found out.
But prosecutors are already investigating the carmaker's one-time "Mr. Quality" for fraud, saying they have "sufficient indications" that he may have known about the questionable software earlier than he has admitted and failed to inform investors.
In the United States, the FBI believes senior VW executives in Germany found out months earlier than they have so far claimed, in July 2015.
VW has so far set aside €22.6 billion to cover fines and compensation related to the affair, but experts estimate the final bill could be much higher.