In a speech to the Bundestag federal parliament, Merkel said both sides were effectively locked in a "trade conflict" since Trump's decision to slap punitive tariffs on steel and aluminum imports, AFP reported.
"It is worthwhile to prevent this conflict from becoming a real war," she said, adding however that this "would require both sides" to take steps.
Trump on Sunday charged that Europe is "possibly as bad as China" on trade, as he reiterated that he is mulling import taxes of 20 percent on EU cars.
The EU has slapped tariffs on iconic US products including bourbon, jeans and Harley-Davidson motorcycles, as a symbolic tit-for-tat response to the metals duties.
Taking aim at Trump over his complaint that the EU, and in particular economic powerhouse Germany, is running a massive trade surplus against the US, Merkel said that his calculation is skewed as it is based only on goods, not services.
"If you include services like the digital services, then you have a completely different trade balance sheet, with the US showing a surplus against the EU," she noted.
"It is almost old-fashioned to only calculate goods and not include services," Merkel said.
Merkel has previously voiced backing for a "digital tax" that would target multinationals like Amazon, Facebook or Google, which have come under fire for shifting earnings around Europe in order to pay lower taxes.
But the EU is divided over the proposal, as countries including Luxembourg and Ireland are loath to see US tech giants head for the exit.
With the US-EU trade row showing few signs of easing, European Commission President Jean-Claude Juncker is heading to Washington by the end of July to seek a way out of the conflict.
Relations between the US and other industrialized powers have turned increasingly tense as Trump has pushed his "America First" stance with punishing consequences for trading partners, regardless of whether they are allies or adversaries.
Historically strong ties between Berlin and Washington have also taken a beating since the US leader repeatedly skewered Germany over its record trade surplus as well as its relatively small defense spending.
Merkel acknowledged that Berlin has not been investing enough on defense, but stressed that it will push outlays to 1.5 percent of gross domestic product by 2025.
Nevertheless, Berlin's planned spending is still short of the NATO goal of 2 percent that Trump insists on.
And despite its 1.5 percent pledge, its latest budget forecast for the coming years shows the proportion actually falling to 1.23 percent in 2022 from 1.24 percent this year – something that could emerge as a point of contention when NATO leaders gather in Brussels next Wednesday and Thursday (July 11-12).
Merkel stressed however that "Germany is a reliable partner in NATO".