The circuit-breaker will see restaurants, bars, cinemas, theatres and other leisure facilities shut across the country from Monday.
Mrs Merkel and the European nation’s 16 state governors, who are responsible for imposing and easing restrictions, agreed on the restrictions during a videoconference on Wednesday.
The tough new measures are set to last until the end of November.
Mrs Merkel said: “We must act, and now, to avoid an acute national health emergency.”
Shops and schools are to remain open, unlike during Germany’s shutdown during the first phase of the pandemic in March and April, while restaurants will be able to provide take-out food.
Mrs Merkel appealed to people not to make unnecessary journeys and said hotels will not be able to accommodate people on tourist trips.
The decision came hours after Germany’s disease control agency said a record 14,964 new confirmed cases of Covid-19 were recorded across the country in the past day, taking the national total in the pandemic to 449,275.
Germany also recorded 27 more virus-related deaths, raising its overall death toll to 10,098, the Robert Koch Institute said on Wednesday.
“We can say that our health system can cope with the challenge today,” Mrs Merkel said. “But if the pace of infections continues like this, then we’ll reach the limits of what the health system can manage within weeks.”
Source: Evening Standard Business News