The parliamentary panel is investigating alleged eavesdropping in Germany by the US National Security Agency and its relationship with German counterparts. The inquiry was launched a year after former NSA contractor Edward Snowden revealed details of secret US eavesdropping programs in 2013.
Reports later in 2013 that the NSA listened in on German government phones, including Merkel's, prompted a diplomatic spat between Berlin and Washington that for a time soured otherwise good relations with the Obama administration.
Merkel declared at the time that "spying among friends" was unacceptable. But subsequent reports indicated that Germany's own BND intelligence agency may have helped the US spy on European companies and officials.
Merkel testified that she first heard about the BND's alleged activities in March 2015, sticking to a line set out by other officials. And she said that her comments about spying among friends remained valid.
"My standard was that spying among friends is not acceptable, and if it happens we have to intervene," she told lawmakers.
Asked how she felt when she first heard of Snowden's revelations, Merkel said: "I have enough experience that it was clear this was a significant matter."
She also defended Germany's failure to achieve a mutual "no-spy" agreement with the US, something that her government held out the prospect of in summer 2013, shortly before a national election. On the German side, "I am convinced that there was very intensive work on it", but those efforts eventually came to nothing, she said.
Merkel stressed the importance and difficulty of "finding the right balance between freedom and security".