The German news magazine Der Spiegel reported Monday that the deal came to light in a "classified letter" to the German parliament's Budget Committee written by Steffen Kampeter, a state secretary at the Finance Ministry in Berlin.
The reported deal is likely to trigger political trouble. Merkel has already come under considerable criticism in Germany in recent years over her move away from a long-held policy of restricting arms exports to crisis regions such as the Middle East, to one of going all out to sell German weapons systems in the Middle East, Africa and Asia.
Der Spiegel reported the letter says that Merkel's new government, comprising her conservative Christian Democratic Union and the center-left Social Democratic Party, intends to offer the Saudis export credit guarantees for the planned patrol boat sale.
The news magazine said that in June 2013, Kampeter wrote to the budget committee approving the government export guarantee for the sale of the first two Type 218SG submarines built by ThyssenKrupp Marine Systems worth $2.18 billion to Singapore, part of a new German arms sales drive into Asia.
The patrol boat contract is the new government's first weapons sale to the Persian Gulf region.
Merkel's previous coalition with the business-friendly Liberal Democrats approved the sale, as it did the controversial $2.5 billion contract to provide for 200 Leopard 2A7+ main battle tanks to Saudi Arabia in 2011.
There have been reports since then that the Saudis now want up to 600 Leopards, a deal worth at least $13 billion, including a long-term operational support program.
If that sale goes through, it would be a market breakthrough for the Germans because so far the Saudis have equipped their armored brigades with some 565 U.S. M1A1 Abrams and M60A3 MBTs, plus French AMX-30s in reserve.
The Leopard is built by Krauss-Maffei-Wegman, with Rheinmetall providing the L55 120mm smoothbore main gun, which produces greater velocity than the L44 gun found on the U.S. M1A1s and earlier model Leopard 2s.
In March 2013, Germany's Bild newspaper reported that Riyadh also wants to buy five Type 209 submarines, also built by ThyssenKrupp, for $3.4 billion, with options on more of the boats.
Berlin has already provided Israel with three advanced variants of the diesel-electric Type 209 and three more are under construction.
These Dolphin-class subs, which can reputedly carry nuclear-tipped cruise missiles, have given the Israelis the most advanced navy in the Middle East with a powerful strategic reach.
In August 2012, Egypt's leading newspaper Al Ahram quoted the country's naval commander, Rear Adm. Osama Ahmed el-Gindi, as saying Berlin had agreed to sell Cairo two Type-209s.
This incensed the Israelis, who claimed their underwater warfare superiority would be eroded. Berlin, which is particularly sensitive when it comes to the security of the Jewish state, has neither confirmed nor denied the report.
For Merkel's new coalition, the reported plans to sell the Saudis scores of patrol craft, apparently to secure the kingdom's maritime borders in the Persian Gulf to the east and the Red Sea to the west against Iran and terrorist infiltrators, is likely to intensify the criticism she has faced for her burgeoning arms exports policy.
German opposition parties have criticized the autocratic rule of Saudi Arabia's absolute monarchy and its 2011 deployment of security forces in neighboring Bahrain to violently suppress pro-democracy protests during the so-called Arab Spring.
The proposed Leopard tank sale has trigged particularly voluble protests in Germany because the 2A7+ is optimized for urban operations, and thus could be used to put down pro-democracy protests in Saudi cities.
Algeria has also become a big buyer of German armaments in the last few years. In 2010 Germans arms manufacturers sold systems worth a paltry $26.7 million. By 2012, they has risen to $534.5 million.
Der Spiegel reported that a Rheinmetall subsidiary plans to produce up to 1,200 Fuchs armored personnel carriers in Algeria over the next decade, on top of the delivery of 54 German-built APCs worth $248 million.