She said she was "angered" by German auto giants who in the "dieselgate" scandal either broke the law or used legal loopholes, but also pointed to the at least 800,000 jobs in the crucial industrial sector.
Speaking just over a month before September 24 elections, Merkel was asked in an online video interview with top-selling Bild newspaper about motorists' fears about the falling resale value of their diesel cars.
To this end, she stressed that she opposed plans by some German cities to fully or partially ban diesel cars from urban areas which have recorded high air pollution levels.
Merkel said "that will be hard work" and the subject of a "summit" with the municipalities involved which she plans to hold on September 4.
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The industry's fall from grace began in 2015 when Volkswagen admitted to installing software in 11 million diesel engines to cheat emissions tests, and suspicions later spread to other manufacturers.
The damage done to the 'made in Germany' brand, along with concerns over pollution and plans by some cities to ban dirty diesels, have fuelled public anger.
Merkel said in the Bild interview that her government must balance the concerns of car owners, auto workers and the industrial sector, without explicitly mentioning public health concerns.
Merkel was dubbed the "car chancellor" in 2013 after she went to bat for the sector and argued against an EU cap on emissions.
In the state of Lower Saxony, which holds a 20-percent stake in Volkswagen and two seats on its board, recent revelations that SPD premier Stephan Weil allowed VW to vet his comments on dieselgate sparked outrage.