Merkel told the conservative legislators that Russia had effectively "stolen" the peninsula and added that "one can call it an annexation", the party source told AFP on condition of anonymity.
The chancellor said Russia must not be allowed to get away with its move on Crimea and stressed the need for a three-fold approach of helping Ukraine, maintaining dialogue with Moscow, while also getting tougher with the Kremlin, including through sanctions.
Merkel, who grew up in communist East Germany and speaks Russian, has held repeated phone calls over the Ukraine crisis with Russian President Vladimir Putin, a former KGB agent who speaks German.
Western powers have said they will not recognise the result.