The pair also launched a spirited defence of free trade -- another issue that the global community feels is under attack from US President Donald Trump's strident rhetoric -- during their meeting at the opulent Great Hall of the People in Beijing.

Earlier this month Trump reimposed US sanctions on Iran that had been eased as part of an agreement aimed at halting Tehran's nuclear programme.

Li warned that abandoning the deal with Tehran "will not just impact Iran, but also have a negative impact on (the ability) to solve other hot international issues through peaceful negotiations".

He did not mention North Korea by name, but analysts have warned that Trump's move has dented Washington's negotiating credibility ahead of his scheduled meeting with North Korean leader Kim Jong Un next month.

The German leader also sounded the alarm about the economic impact of the move on Europe.

Supporters fear the reimposition of US sanctions could hit European firms that have done business with Iran since the 2015 accord was signed.

If European companies pull out or shrink operations in Iran to avoid falling foul of US law, it would "create an opportunity for businesses in other countries to step in and play a greater role", Merkel said.

At a meeting with President Xi Jinping, Merkel welcomed Chinese moves to reduce automobile import tariffs and allow foreign carmakers to own a majority stake in joint ventures with Chinese partners.

"We mustn't rest on our laurels" Merkel told Xi, noting the "world is changing very quickly" and the question of market access and reciprocity was becoming more important as Chinese firms push into Germany.

European and American leaders have long complained that it is difficult to do business in China.

The Chancellor reiterated Berlin's demand for Beijing to ease barriers on foreign investment, saying the two countries would sign a memorandum of understanding to offer mutual access to each others' markets for autonomous vehicles.

"China and Germany are on the path of promoting multilateralism and bolstering free trade," said Merkel, who was accompanied by an industry delegation of 18 German executives.

Merkel was expected to take up the case of Liu Xia, the widow of Nobel peace laureate Liu Xiaobo, who remains under house arrest without charges nearly a year after her husband died of cancer in custody.

"We have found a dialogue mechanism where difficult questions can be raised," she said.