"There is freedom of demonstration in Germany, but there is no place for spreading hatred and slander against people who come to us from other countries," Merkel said at a news conference here yesterday.
Therefore, everyone should be careful not to become tools in the hands of the organisers of such events, she said.
More than 10,000 people had demonstrated in eastern Germany against "criminal asylum seekers" and the "Islamisation" of the country, in the latest show of strength of a growing far-right populist movement yesterday.
The government has estimated that around 95,000 people have been granted asylum during the first half of this year and their number for the whole year could exceed 200,000. More than one-fifth of the refugees are from the conflict zone.
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Several state governments and municipalities say they are stretched to the limit to provide accommodation and financial support to the refugees.
Chancellor Merkel said her government is working on a plan to solve the problems in providing shelter for the refugees and in supporting them.
He expressed fears that the anti-Islam protest movement could lead to a "new escalation of the agitation against migrants and refugees" in a media interview.
"Among the demonstrators, there are people with a clear affinity to hatred against foreigners. This is disgusting and despicable," Maas said.
Deputy chancellor and Economy Minister Sigmar Gabriel accused Pegida of attempting to drive up hatred against foreigners and working closely with neo-Nazis.
The organisation is misinterpreting facts to create fear among the public, he said.
The organisers of the protests, however, claim that their movement is similar to the 'we are the people' demonstrations in Dresden which led to fall of Berlin Wall and collapse of the communist regime in former East Germany 25 years ago.
Their demands included tightening of the government's asylum policy and expulsion of migrants involved in crime.
Since the beginning of this year, Germany has been experiencing an influx of refugees, especially those fleeing the fighting in Syria and in Iraq.