Together, Germany, France and the U.S. are leading the push for new, tougher sanctions against Tehran to punish the hard-line regime of President Mahmoud Ahmadinejad for refusing to stop uranium enrichment.
America and its European allies say the Iranian nuclear program is a covert attempt to obtain atomic weapons. Iran says its program is solely for peaceful purposes.
During a weekend visit to Mr. Bush's Texas ranch, Merkel made clear that Germany will back more sanctions if Iran fails to give way and stressed that she and Mr. Bush agree that the issue "can be resolved diplomatically."
She also said that "the signals, if developments continue to be so negative, point to us limiting our trade activities" with Iran, and that she would "remain in contact with German business" on that.
Meanwhile, Secretary of State Condoleezza Rice said she does not believe a Senate resolution authorizes President Bush to take military action against Iran.
"There is nothing in this particular resolution that would suggest that from our point of view. And, clearly, the president has also made very clear that he's on a diplomatic path where Iran comes into focus," Rice said Sunday.
The Senate in late September voted 76-22 in favor of a resolution urging the State Department to designate Iran's Islamic Revolutionary Guard Corps as a terrorist organization.
While the resolution attracted overwhelming bipartisan support, a small group of Democrats said they feared labeling the state sponsored organization a terrorist group could be interpreted as a congressional authorization of military force in Iran.
Rice said Mr. Bush was focused on diplomatic options - not waging war.
"Obviously, it can be the case that he will never take his options off the table, but this particular resolution has nothing to do with that from our point of view," Rice said. "This resolution is saying that there needs to be strong measures taken against Iran, which we have definitely done."
"And if the Iranians suspend their enrichment and reprocessing, I'm prepared to meet my counterpart anyplace, anytime, anywhere," she added. "So the question isn't why will we not talk to Tehran. The question is, why will Tehran not talk to us?"
Ahmadinejad has vowed never to abandon enrichment, which his government claims as their legal right - for energy production - under the auspices of the Nuclear Non-Proliferation Treaty.
Rice spoke on ABC's "This Week."
The challenge for Mr. Bush, Merkel and Sarkozy is to get the backing of key U.N. Security Council members Russia and China for a new set of punitive measures. Both countries have strong economic ties with Tehran and have thus far resisted the call for a round of harsher sanctions.
China, under intense pressure from Washington to take a harder line on Iran, announced Monday it is sending its foreign minister to Tehran for talks.
Foreign Minister Yang Jiechi will visit Iran Tuesday at the invitation of his Iranian counterpart Manouchehr Mottaki, ministry spokesman Liu Jianchao said.
According to a report on the official Xinhua News Agency, Liu said Yang "will exchange views with the Iranian side on China-Iran relations, the Iran nuclear issue as well as regional and international issues of common concern."
China agreed to earlier sanctions against Iran from the U.N. Security Council, but has argued against. Beijing's refusal to endorse further tough economic sanctions reflects both its traditional distaste for such intervention and its diplomatic and economic ties to Iran.
China has been urged to take a stronger stance on Iran during recent visits to Beijing by U.S. Defense Robert Gates and Israeli Foreign Minister Tzipi Livni.
The European Union has also said China's cooperation was important.
Ahmadinejad, meanwhile, has called domestic critics of his country's disputed nuclear program "traitors" and vowed to expose their collaboration with Iran's enemies, state media reported Monday.
"They are traitors," the official IRNA news agency quoted Ahmadinejad as saying of his critics.
"Based on the pledge (I) made with the people, we won't retreat and won't standby... We are not revealing them because of some sensitivities, but upon closure of the nuclear issue, we will reveal all these issues," IRNA quoted him as telling a group of students.
Sunday, IRNA reported that Iran's new top nuclear negotiator will meet with European Union foreign policy chief Javier Solana later this month to discuss Tehran's disputed nuclear program.
Saeed Jalili met with Solana last month in Rome, but the talks planned for late November would be his first unaccompanied by his predecessor, Ali Larijani.
The November session could provide an indication of whether Larijani's departure signaled a hardening of Iran's already defiant stance in its nuclear standoff with the West.