Merkel, speaking a day before Foreign Minister Avigdor Lieberman visits Berlin, also said progress in the stalled Middle East peace process would make it easier to resolve the long-running standoff over Iran's nuclear program.
Prime Minister Benjamin Netanyahu has yet to commit to a two-state solution.
"There is no alternative to such a solution," Merkel said after meeting King Abdullah II of Jordan. "We hope that the new Israeli government will make progress here with the Palestinian forces."
"It is essential that progress in the peace process in the Middle East be made, because this also will improve the chances of an agreement with Iran," she said.
Merkel said that "an opportunity arises from the combination of a new attempt with a new American team and the objective necessity, and we want to use it."
Abdullah said that "It is in our vital national interest that a two-state solution is resolved so that we can finally bring peace and stability to the region."
Merkel also underlined her countries support for "a constructive dialogue with Iran under certain conditions." Germany has been among countries leading efforts to defuse concerns that Iran is seeking a nuclear bomb.
She pointed to past international offers of incentives for Iran to give up uranium enrichment and to the new US administration's readiness to engage with Iran.
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