Germany and France agree common position on debt crisis
It comes ahead of a crunch meeting of eurozone leaders to resolve the Greek debt crisis and prevent further contagion to other eurozone economies.
Details of the deal have not yet been released.
Jean-Claude Trichet, the European Central Bank (ECB) president, was also brought into the discussions, according to a spokesman for Mrs Merkel.
Germany had previously insisted that Greece's lenders should be forced to take losses as part of any further rescue deal for Athens.
But this had been opposed by France and the ECB, who fear it could spark a Europe-wide banking crisis, push Spain and possibly Italy into trouble, and even jeopardise the solvency of the ECB itself.
Meanwhile, new figures from Markit's PMI survey show that the eurozone's private sector grew at its weakest pace in almost two years in July, recording a score of 50.8, down from 53.3 in June. Any score above 50 indicates growth.
"The eurozone recovery lost almost all of its momentum in July," said Markit's chief economist Chris Williamson.
'Very serious' Policymakers are set to discuss a range of measures at the meeting later on Thursday, including a new loan package to Greece and the role of private investors in any debt restructuring.
End QuoteThe summit in Brussels on Thursday is turning out to be a cliffhanger”
Greece received its first aid package in May last year, but the debt crisis continues to undermine confidence in global financial markets, with some commentators suggesting it threatens the future of the euro itself.
Politicians and investors are calling for decisive action to help bring the crisis to an end.
"Nobody should be under any illusion; the situation is very serious," European Commission President Jose Manuel Barroso said on Wednesday.
"It requires a response. Otherwise, the negative consequences will be felt in all corners of Europe and beyond."
End Quote Jose Manuel Barroso European Commission PresidentNobody should be under any illusion; the situation is very serious”
The International Monetary Fund has also called on European leaders to take swift and decisive action.
Delaying such action further would be "very costly" for the world economy, it said.
Spending cuts However, there are divisions among policymakers about the best way to resolve the crisis.
There appears to be consensus on the need for a new loan agreement, analysts say, thought to be similar in size to the 110bn euro ($156bn; £97bn) package agreed last year.
However, there is also a growing consensus that this will merely act as a sticking plaster, and that the fundamental problem of Greece's indebtedness needs to be addressed.
Athens has already implemented a raft of wide ranging austerity measures, including spending cuts and tax rises, and earlier this month agreed to further drastic action to cut its debt.
Bank tax But there is a growing sense that these will not be enough. The only way to resolve the problem is to restructure Greece's debts, many observers argue.
End QuoteThe leaders who will meet in Brussels on Thursday still have the power to decide whether this crisis is going to end with much greater integration and burden-sharing between the governments of the eurozone - or a dramatic break-up”
But the European Central Bank has strongly opposed this plan, arguing that such a rollover would constitute a default in the eyes of the international credit ratings agencies and, as such, would undermine investor confidence and the euro itself.
An alternative way to get private investors to contribute to any aid package would be to introduce a new bank tax.
Reports suggest leaders will discuss precisely such a tax, even though this would prove hugely unpopular with the banks.
It is these divisions that explain Mrs Merkel's attempts to dampen expectations ahead of the summit.
The summit will take place in Brussels at 1300 local time (1100 GMT).
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