Merkel, who became chancellor of Germany in November 2005, was cited by the magazine in its latest edition for her efforts to streamline Europe's biggest economy, increasing the national retirement age and putting more women in senior government posts.
The magazine was impressed with her because she "bulldozes through controversy," referring to her meeting with the Dalai Lama last year, her chastising of Zimbabwe's Robert Mugabe and push "to make the euro a bigger player in global financial markets as the dollar wanes."
Sheila C. Bair, the chairman of the Federal Deposit Insurance Corp., was No. 2, and Indra K. Nooyi, chief executive of PepsiCo, was third.
Rice fell to No. 7 and the magazine said she was "shoring up her legacy before the Bush administration leaves office" by engaging in more efforts for peace in the Middle East, working with North Korea and trying to engage Iran.
Several other female heads of state or government made the list, including Argentina's President Cristina Fernandez at No. 13; Chile's President Michelle Bachelet at No. 25; and Philippines President Gloria Arroyo at No. 41.
U.S. Sen. Hillary Rodham Clinton was No. 28, down from No. 25 last year; U.S. House Speaker Nancy Pelosi was No. 35, down from No. 26; and U.S. First Lady Laura Bush was 44th, up from No. 60 last year.