The battle was the longest of World War I. Killed were more than 163,000 soldiers from France and 143,000 from Germany in the battle that last 10 months in 1916. Hundreds of thousands were wounded and around 60 million shells were fired in the conflict.
The two current leaders laid a wreath at a military cemetery in Consenvoye, near Verdun, where 11,148 German soldiers are buried.
Later they stood at attention as the French and German national anthems were played beside the Douaumont Ossuary, a memorial to 130,000 unidentified troops from both sides of the conflict, in northeast France.
Douaumont was the scene of a historic meeting in 1984 when former French President Francois Mitterrand and then-West German Chancellor Helmut Kohl held hands during the French national anthem in a display of French-German friendship.
"Verdun is more than the name of your town -- Verdun is also one of the most terrible battles humanity has experienced," Merkel said in a speech at city hall. She said Hollande's invitation to join in the ceremony was "a great honor."
Hollande said, "We are all called upon to keep awake the memory (of Verdun) in the future, because only those who know the past can draw lessons from it," the German leader said.
"Verdun is a city that represents -- at the same time -- the worst, where Europe got lost, and the best, a city being able to commit and unite for peace and French-German friendship," he said.
He called Verdun "the capital of peace."
Merkel said the commemorations show "how good relations between Germany and France are today."
Some 3,400 young people took part in a symbolic re-enactment choreographed by German filmmaker Volker Schlöndorff.
Some of the villages in the area were never rebuilt because of unexploded shells.