The proposal of an interest-free EU loan, outlined in a Financial Times editorial, aims to provide long-term support for Ukraine without violating property rights.
The assets would remain frozen until Russia pays reparations for the war, Merz suggested, addressing longstanding legal and financial concerns that had previously made Germany and other EU states wary of confiscating Russian assets.
Under the plan, the loan would initially be guaranteed by member states and later backed by the EU's long-term budget from 2028.
"We need a new impetus to change Russia's calculations," Merz said in the editorial.
"Now is the moment to apply an effective lever that will disrupt the Russian president's cynical game of buying time and bring him to the negotiating table."
The editorial marks the first time Merz has given his backing to an EU plan to send the roughly 210 billion euros ($A374 billion) held in a Belgian depository to Ukraine without confiscating it - a red line for many member states and the European Central Bank.
Finance Minister and Vice Chancellor Lars Klingbeil, in a separate statement, said Europe needed to exert maximum pressure on Russian President Vladimir Putin to end the war against Ukraine.
"That is why it is right to make greater use of frozen Russian assets. Germany is prepared to explore new avenues that are legally possible and responsible."
The plan, important for Ukraine support amid uncertainty over the United States' commitment to Kyiv under President Donald Trump, is likely to dominate an informal EU summit in Copenhagen next week.
"I propose that, at the European Council at the end of October, we give the mandate to prepare this instrument in a legally secure manner," Merz said, adding that payments should be disbursed in tranches and decisions on the arms procured should be taken jointly by Kyiv and EU member states.
Until now, the EU has taken only interest generated from the Russian assets, which were frozen after Moscow invaded Ukraine in February 2022.
Germany, the EU's biggest economy and Ukraine's second-biggest military backer, has previously expressed legal concerns over any proposals to seize the assets completely.
The United States has long been Ukraine's biggest single backer and weapons supplier, but Trump says Europe should take on a much greater share of its own defence burden.
