"The situation has become complicated. Construction in settlements is making the formation of a Palestinian state difficult. The withdrawal from Gaza was hard for you, but things have not become easier," she told students of Tel Aviv University.
She also condemned the non-renewal of negotiations between Israel and the Palestinians. "The stalemate in negotiation is dangerous; there is no room for excuses," she said.
Merkel also rejected notions that Israel is isolated from Europe, saying that "Europe will not turn its back on Israel and neither will the United States. We feel uncomfortable because things are not progressing. In an honest and straightforward manner I will tell you that you are missing an opportunity. History will not give you many more." the chancellor said.
"Negotiations must be renewed as soon as possible. This requires painful concessions on both sides. The aim should be a Jewish-democratic state existing peacefully alongside a Palestinian state."
Merkel also spoke of the uprising in Egypt. "I don’t agree with the interpretation saying the US stabbed the Mubarak regime in the back. What the Americans have said is that it is clear significant change is needed, something which Israel has also agreed with," she said.
"Tunisia has an opportunity to turn over a new leaf in politics, and our eyes are also on Egypt. I hope that during the protests people will refrain from using force against unarmed citizens, and maintain freedom of information and expression. Israel and Egypt have the longest-standing peace agreement and I hope that this will continue," she said.
Regarding the inquiry into the murder of Lebanese leader Rafik Hariri and the subsequent turmoil in the country, Merkel stressed the need to "keep Lebanon from falling into a political crisis".
"We have found ourselves in a situation in which Iran is the Middle East and specifically Israel. If Tehran continues to refuse to discuss its nuclear program, more severe sanctions will be unavoidable," Merkel said.
Merkel: Iran threatening Middle East (Photo: Yaron Brener)
Honorary doctorate 'motivating'
Merkel also thanked the university for bestowing upon her an honorary doctorate degree. "It is a great honor to be here in Tel Aviv at this special time," she said.
"Receiving this honor strengthens my commitment to Israel. It signifies recognition of what I have done and gives me motivation to continue to improve relations between Israel and Germany."
The German chancellor praised cultural exchanges she said were proliferating between Israel and her country. "I am happy to see all of the Israeli tourists who come to Berlin," she said.
Peres reminded Merkel that Hamas took over Gaza following democratic elections. "The world saw what happened in Gaza when they pushed for democratic elections and a radical and dangerous movement, which won't give the Gazans one day of democracy, rose to power.
Aviel Magnezi and Boaz Fyler contributed to this report
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