The Ukrainian, Russian, German and French foreign ministers were due to meet in Berlin at 4.30 p.m. (1430 GMT) to discuss restoring a 10-day ceasefire in eastern Ukraine, which the chancellor said had prompted "no significant reaction" from the separatists. (Agencies)
"We will not stop looking for diplomatic solutions," Merkel said. "But we are nowhere near where we want to be."
"Regarding sanctions against Russia, we have so far reached level two and we cannot rule out having to go further," Merkel said, referring to measures against Russian officials and firms the West accuses of undermining Ukraine's territorial integrity.
The European Union and United States have threatened to ratchet up sanctions against the Russian economy unless it reins in the separatists in eastern Ukraine. Moscow denies supporting them.
Separatists fired a shoulder-launched missile that struck and damaged an SU-24 attack plane, a military spokesman said, while a Ukrainian border guard was killed in a mortar attack.
"The armed forces and the National Guard are continuing the offensive on terrorists and criminals," Ukrainian parliament speaker Oleksander Turchynov said.
President Petro Poroshenko, under pressure at home to take a tough line on rebels who have been fighting Kiev's forces since April, refused to renew a ceasefire on Monday night and ordered an offensive against "the terrorists, militants and marauders".
That won backing from the United States, but drew criticism from Russia's Vladimir Putin who said Ukraine's newly-elected leader had veered off the road to peace.
Separatism erupted in the Russian-speaking east in April, when rebels seized buildings and strategic points, declaring "people's republics" and saying they wanted union with Russia. By June 30, a total of 191 Ukrainian service personnel had been killed, including 145 soldiers, said Andriy Lytsenko, a spokesman for the national security and defence council. Hundreds of civilians and rebels have been killed. Diplomats cautioned against expecting any major breakthrough at the foreign ministers' meeting in the biggest Russia-West confrontation since the Cold War.
"It would be good if we could agree on steps towards a mutual, lasting ceasefire, but this is anything other than a simple undertaking," said a spokesman for German Foreign Minister Frank-Walter Steinmeier.
"There is not a precise objective. It's an opportunity to work on peace efforts, but we don't want to raise expectations," a French diplomatic source said on Tuesday.
The Ukrainian, Russian, German and French foreign ministers were due to meet in Berlin at 4.30 p.m. (1430 GMT) to discuss restoring a 10-day ceasefire in eastern Ukraine, which the chancellor said had prompted "no significant reaction" from the separatists.