Merkel, in a joint news conference with Israeli Prime Minister Binyamin Netanyahu, said that under German law it would be permissible to label products as having been produced in Israeli settlements on the West Bank, the Jerusalem Post reported.
"We do not support the demands for a boycott. This is not an option for Germany," she said. "We have certain rules of labeling and we have to adhere to those rules, but we do not believe in boycotts."
Netanyahu told her he hopes "others follow your lead." He said boycotts would create more "Palestinian intransigence" without doing anything to help the Palestinian economy.
Actress Scarlett Johansson came under fire last month for endorsing SodaStream, an Israeli factory on the West Bank. The Israeli newspaper Haaretz said Monday that it believes many Israelis check labels carefully and avoid buying products produced on the West Bank.
Merkel said she accepts that the Palestinians must recognize Israel's right to exist as a precondition for a political settlement.
Since 2005, Israel has been the target of a global effort called the boycott, divestment and sanctions movement, which seeks to put pressure on Israel to pull out of its settlements in contested Palestinian areas and allow Palestinian refugees to return. The Post noted several U.S. academic organizations have recently joined the movement.