"I mourn Liu Xiaobo, the courageous fighter for human rights and freedom of expression," Merkel's spokesman Steffen Seibert tweeted on her behalf.
"His family has my deep sympathies."
Her justice minister Heiko Maas earlier hailed Liu as a "hero in the battle for democracy and human rights".
Germany had said it was prepared to welcome Liu for medical treatment, after he was transferred from prison to hospital in China last month following a terminal liver cancer diagnosis.
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Liu became the first Nobel Peace Prize laureate to die in custody since German pacifist Carl von Ossietzky, who passed away in a hospital while held by the Nazis in 1938.
Seibert had said yesterday that reports on the 61-year- old's poor health "raise the question of whether Mr Liu's cancer should have been diagnosed and treated far earlier".
Liu was arrested in 2008 after co-writing Charter 08, a bold petition that called for the protection of basic human rights and reform of China's one-party Communist system.