She told parliament that Russia's absorption of Ukraine's Crimea region, which has been condemned as a violation of international law, demanded a "resolute and united" response by Europe and its partners.
"At the European Council beginning today, the heads of state and government of the European Union will decide further phase-two sanctions that we agreed two weeks ago," Merkel said ahead of the two-day summit in Brussels.
Among them would be "an extension of the list of responsible people against whom travel restrictions and account freezes are in effect," she said.
At a crisis summit on March 6, EU leaders agreed a three-step scenario against President Vladimir Putin that began with the suspension of talks on easing visas into Europe for Russian travellers.
This week, the EU ratcheted up its response by slapping an asset freeze and travel ban on 21 Russians and Ukrainians deemed to be behind the annexation of Crimea, including three top military brass.
G8 'can no longer exist'
Merkel also warned Moscow of possible economic sanctions if the crisis escalates.
"Furthermore the EU Council today and tomorrow will make clear that we are ready at any time to apply third-phase measures in the event of a further worsening of the situation.
"And it will, without doubt, be a question of economic sanctions," she said.
Turning to Russia's position in the G8, Merkel said "as long as there aren't the political conditions for such an important format as the G8 at the moment, there can no longer be a G8, neither a summit nor the format as such".
Preparatory meetings for a scheduled June G8 summit in the Russian Olympic resort of Sochi have already been suspended by the other members.
Military contract put on hold
Germany on Wednesday halted a major deal to provide a fully equipped training camp to Russian forces, saying any arms trading with Moscow was currently "indefensible".
Vice-Chancellor Sigmar Gabriel announced the suspension of the Rheinmetall project as Moscow tightened its grip on the flashpoint Crimean peninsula.
The German Economics Ministry said in a statement it was in touch with the defence group, whose contract with the Russian authorities was reported to be worth around €120 million – with the capacity to train 30,000 soldiers a year.
The ministry said there were no current plans to deliver anything in conjunction with the deal, and that the firm would be kept informed, "so that the government could take necessary measures in the light of developments."
The deal was mentioned in a 2011 report, and did not include the supply of weapons to Russia – business which was halted at least ten years ago, the ministry spokesman said.
A Rheinmetall spokesman had said earlier on Wednesday the company would fulfil its contractual obligations to build the centre, but that it was in contact with the government about political developments. It would not comment on the decision to block the project.
RWE defends sale to Russian investor
German energy giant RWE defended its decision to sell its subsidiary Dea to a Russian investor in a billion-euro deal. RWE CEO Peter Terium said the German government had been kept well-informed of the deal as it was negotiated over the past months.
"This is a business decision," he said. The buyer had not only offered the best price, said to be around €5 billion, but also the best perspectives for the firm's employees, he added.
German business is continuing to batten down the hatches in the expectation of continued, and possibly increased, sanctions against Russia. Eckhard Cordes, chairman of the Committee on Eastern European Economic Relations, a business lobby, said, "I continue to hope that we will find a political solution."
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