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In a speech in Potsdam, she said the so-called "multikulti" concept - where people would "live side-by-side" happily - did not work.
Mrs Merkel's comments come amid recent outpourings of strong anti-immigrant feeling from mainstream politicians.
A recent survey showed that more than 30% of Germans believed Germany was "overrun by foreigners".
The study - by the Friedrich Ebert Foundation think-tank - also showed that roughly the same number thought that some 16 million of Germany's immigrants or people with foreign origins had come to the country for the social benefits.
Mrs Merkel told a gathering of younger members of her conservative Christian Democratic Union (CDU) party on Saturday that at "the beginning of the 60s our country called the foreign workers to come to Germany and now they live in our country... We kidded ourselves a while, we said: 'They won't stay, sometime they will be gone', but this isn't reality.
"And of course, the approach [to build] a multicultural [society] and to live side-by-side and to enjoy each other... has failed, utterly failed."
In her speech, the chancellor specifically referred to recent comments by German President Christian Wulff who said that Islam was "part of Germany" like Christianity and Judaism.
While acknowledging that this was the case, Mrs Merkel stressed that immigrants living in Germany needed to do more to integrate, including learning to speak German.
"Anyone who does not immediately speak German", she said, "is not welcome".
Her comments come a week after she held talks with Turkish Prime Minister Recep Tayyip Erdogan, in which the two leaders pledged to do more to improve the often poor integration record of Germany's estimated 2.5 million-strong Turkish community.
Earlier this week, Horst Seehofer, the leader of the CDU's Bavarian sister party, CSU, said about integration that it was "obvious that immigrants from different cultures like Turkey and Arab countries, all in all, find it harder".
"'Multikulti' is dead," Mr Seehofer said.
In August, Thilo Sarrazin, a senior official at Germany's central, said that "no immigrant group other than Muslims is so strongly connected with claims on the welfare state and crime". Mr Sarrazin has since resigned.
Such recent strong anti-immigrant feelings from mainstream politicians come amid an anger in Germany about high unemployment, even if the economy is growing faster than those of its rivals, the BBC's Stephen Evans in Berlin says.
Our correspondent adds that there also seems to be a new strident tone in the country, perhaps leading to less reticence about no-go-areas of the past.
The Following 2 Users Say Thank You to alfieb For This Useful Post:
im glad Germany finally had the guts to say what they had been wanting to say for quite some time now..and i think most Europeans will agree with her..its not Racist to say that multiculturalism has failed..
The Following 6 Users Say Thank You to evon For This Useful Post:
Turkey will never be apart of the EU because you will bring Islam with you. To be honest we have enough Islam here already.
Turkey recently opened it's borders to some Arab states so we would have no control over who comes here.
Turkish president said some thing about the wombs of it's women being the solders of Islam, some thing like that.
What exactly is multiculturalism? If it's a culture where the development paralell societies with ancient bloody rites from eastern Anatolia and Arabia that have nothing to do with the host country or are even acting againstis seen with indifference or coward approvement then indeed it has failed and that's a good thing. To say that immigrants are generally a negative influence and underachievers is wrong though. Ever since I can remember there have been plenty of non Germans around me(schoolmates, coleagues, others) so that it's perfectly normal to me. And this goes for the majority of my generation.