A new version of a draft worked on in Geneva has not been published but all sides agreed that any deal must "uphold Ukraine's sovereignty".
US President Donald Trump initially gave Ukraine's President Volodymyr Zelenskyy until Thursday to respond to the plan under which Ukraine would give up territory it controls, cap the size of its army and permanently close the door on Nato membership.
Merz threw doubt on Trump's deadline, saying discussions would be a "lengthy, long-lasting process".
"I don't expect a breakthrough this week."
In a sign of the sensitivities involved, Poland's Prime Minister Donald Tusk said: "The issue is delicate because nobody wants to put off the Americans and President Trump".
Zelenskyy said Monday his country was at a "critical moment", after last week insisting Ukraine risked losing either its "dignity" or Washington as an ally.
"To achieve real peace, more, more is needed. Of course we all continue working with partners, especially the United States, and look for compromises that strengthen but not weaken us," he added.
Russia's President Vladimir Putin has said the original US plan could be a basis for a deal. His country's invasion has taken over eastern Ukraine, forced millions to flee their homes, ravaged towns and cities, and killed tens of thousands in Europe's worst conflict since World War II.
As talks continued, the war ground on. Russia, which has fired record numbers of missiles and drones in recent months, claimed another southern Ukrainian village on Monday. A Russian drone strike on the Ukrainian city of Kharkiv late Sunday killed four people and caused widespread damage, officials said.
The issue of territory, Zelenskyy said, remained a major problem in the talks.
"Putin wants legal recognition for what he has stolen," the Ukrainian leader said.
EU chiefs hailed progress towards a deal but also said there were outstanding issues to resolve.
"There is a new momentum in peace negotiations," European Council president Antonio Costa said on the sidelines of the summit in Angola.
"While work remains to be done, there is now a solid basis for moving forward," added European Commission President Ursula von der Leyen.
Putin last week welcomed the first US plan and Washington faced accusations that Moscow helped draft it.
In a call with Turkish President Recep Tayyip Erdogan on Monday, the Russian leader repeated his view that the initial US plan could "serve as a basis for a final peace settlement".
The Kremlin said it had not been informed on the results of the Geneva talks, but that it was aware "adjustments" were made to the US proposal.
Putin's spokesman told reporters, including AFP, that so far no Russia-US talks were planned this week.
In Washington, Trump appeared hopeful of a breakthrough.
"Don't believe it until you see it, but something good just may be happening," Trump said on social media.
In Geneva on Sunday, the Ukrainian delegation said a new draft of the plan, "already reflects most of Ukraine's key priorities".
US Secretary of State Marco Rubio said "tremendous" progress had been made at the talks.
"I honestly believe we'll get there," Rubio said, adding: "Obviously, the Russians get a vote."
Moscow has captured and occupies large swathes of southern and eastern Ukraine, since it invaded claiming to have annexed five Ukrainian regions, including Crimea, which it seized in 2014.
The Kremlin is seeking recognition of the territories it occupies and wants Kyiv to pull out of the part of the Donetsk region that remains under its control - demands deemed unacceptable by Ukraine.