Merkel reiterated that Germany would insist on stringent security standards without barring individual companies.
"I'm against excluding a single company but I'm in favour of doing everything we can to ensure security," she said during a question-and-answer session in parliament. Critics however have accused export-reliant Germany of trying to appease China, its largest trading partner, and putting economic interests first.
Hauwei has strongly denied allegations that its equipment could be used to spy for Beijing.
The company's chairman Liang Hua told AFP that Huawei had never been asked by the Chinese government to eavesdrop on its customers.
"In the past 30 years we have never been the object of such a request. Even if one was made in the future, we would turn down such a request," he said. Telecom experts consider the company as the leader in 5G equipment, in terms of both technology and price.
But US President Donald Trump has ordered American firms to cease doing business with Huawei over the espionage concerns, and has urged other countries to follow suit.
Australia and Japan have already taken steps to bar or tightly restrict the firm's participation in their rollouts of 5G networks.
Earlier this month, Prime Minister Boris Johnson strongly hinted that Britain would follow.