“Intensive discussions are ongoing between the Italian government and the European Commission and I am convinced that the questions that are being discussed will be resolved,” Merkel said at a joint press conference with Irish Prime Minister Enda Kenny.
“I do not see a crisis developing in a general sense,” she added.
Fears are rife on the financial markets that Italy could reignite the eurozone debt crisis if it fails to tackle the €360 billion ($398 billion) in bad debt sitting in its national banks.
Markets have turned sour on several Italian banks, most notably Italy's number-three lender and the world's oldest bank, Banca Monte Paschi.
The bad debt predicament poses political as well as economic difficulties for Prime Minister Matteo Renzi, who must obey new eurozone rules which limit a bailout of banks using public money unless investors shoulder bear part of the burden.
A huge bad debt burden is also poison for the economy as it restricts the amount of money that banks can lend to businesses, thus holding back growth.
The Italian economy has been ticking along with tepid if any growth the past few years, failing to recover much ground lost following the global economic and eurozone crises.