Speaking at the ongoing international craftsmanship fair in Munich, Merkel said that the "carefully-weighed" recent landmark verdict by the Federal Administrative Court in Leipzig presented municipal governments with a variety of different options to lower nitrogen oxide emissions levels.
Under a "blue placard" system proposed in the wake of the "dieselgate" scandal, only cars with relatively low emissions levels would be allowed to enter cities and towns.
Several municipal governments have demanded the creation of corresponding federal legislation to prevent a patchwork of regional driving ban policies which would be difficult to enforce in practice.
Growing calls for such radical action have gained renewed momentum in Germany after Berlin admitted that at least 20 German cities would fail to comply with European Union (EU) limits for nitrogen oxide emission levels by 2020.
According to the Federal Environmental Agency (UBA), diesel cars are responsible for more than 50 percent of harmful nitrogen oxide emissions. The EU has threatened to sue Germany before the European Court of Justice (CFEU) unless the situation is addressed swiftly.
Merkel insisted on Friday that while the automotive industry had "also made mistakes", it was now primarily the responsibility of state and municipal governments to use the powers granted by the verdict of the Federal Administrative Court to take proportionate and targeted action to reduce urban air pollution.
She proposed technical upgrades for vehicles used in local public transport and stricter requirements for taxis as a superior short-term solution to the blanket diesel driving bans implied by the "blue placard" system.