"The existence of such prisons is not compatible with my understanding of the rule of law," Merkel told Deutsche Welle Saturday.
While she said she supported the fight against terrorism, "we must find answers to how we can combat terrorists effectively without calling our fundamental principles and beliefs in question."
She joined Spanish Prime Minister Jose Luis Rodriguez Zapatero in condemning the CIA practice.
Despite her criticism, Merkel, whom Forbes magazine last month designated as the world's most powerful woman, said she welcomed the fact that President Bush raised the issue of the prisons himself.
Bush acknowledged last Wednesday that 14 high-profile al-Qaida terrorists had been held in secret CIA facilities in undisclosed locations, a fact that was reported last year and generated international controversy.