Merkel, who has been critical of US President Donald Trump's attempt to impose a temporary travel ban on people from seven Muslim-majority countries, was speaking on Saturday at the Munich Security Conference, with US Vice President Mike Pence in the audience.
"I think, those countries, first and foremost have to give a contribution. Because only in this way we would be able to convince people that it is not Islam that is the source of terrorism. But a falsely understood Islam," she said.
"I expect from religious authorities of Islam to find strong language in order to delimitate peaceful Islam from terrorism committed in the name of Islam. We as non-Muslims cannot do this, it should be done by Islamic clergy and authorities," she added, Aljazeera reported.
Merkel said Europe's ties with Russia remained challenging, but it was important to work with Russia in the fight against Daesh (ISIL or ISIS) and similar groups.
She stressed the need to preserve and strengthen multilateral structures such as the EU, NATO and the UN during an address that came as concern grew about the Trump administration's approach to international affairs and fears that it may have little interest in working in multilateral forums.
Trump's criticism of NATO as "obsolete", his praise for Britain's decision to leave the EU as well as his softer approach towards Russia have unnerved allies.
"Acting together strengthens everyone," said Merkel. "We must see that the multilateral structures are in many places not efficient enough.
"I am firmly convinced that it is worth fighting for our common international multilateral structures, but we must improve them in many places."