"The existence of such prisons is not compatible with my understanding of the rule of law. Even in the fight against terrorism... the ends do not justify the means," Merkel said in Berlin on Saturday. "Instead we must find answers to how we can combat terrorists effectively without calling our fundamental principles and beliefs in question," she said.
Since media reports first revealed the CIA operation last November, Bush and other members of his administration have refused to publicly discuss the program. At the end of last year, US Secretary of State Condoleeza Rice visited Europe and defended Washington's treatment of its detainees in the war on terrorism, but did not address the issue of whether the CIA had operated secret prisons.
This week however, US President George W Bush admitted for the first time that the CIA was running secret prisons where high-level al Qaeda figures captured since the September 11, 2001 terrorist attacks were held and interrogated. He did not name their locations.
The revelation has also added weight to a report by the Council of Europe in Strasbourg, the continent's main human rights watchdog and independent from the EU, which said that several European states had helped the US carry out "extraordinary rendition" flights, the US practice of transporting detainees to other states for interrogation.
Bush's public admission has prompted renewed calls by European lawmakers that their governments divulge the locations of the secret CIA prisons.
Germany's Interior Minister Wolfgang Schäuble also condemned the detentions.
"I've never seen a reason for interning terror suspects -- like in Guantanamo -- outside the jurisdiction of American courts. It's highly questionable," Schäuble told regional paper Passauer Neue Presse, adding that he had no information that the CIA had operated secret prisons in Germany.
"Our American friends are also well advised to protect our freedom and legal system in such a way as to ensure that the fundamental principles of the legal system are not abandoned. When it comes to a ban on torture there can be no leeway," Schäuble said.
The German government's human rights commissioner, Günter Nooke said it was unacceptable that President Bush seemed to want to justify the "special interrogations" in the prisons.
"I want to know where the prisons are and who knew about them," Nooke said.
Reinhard Bütikofer, head of the opposition Green Party accused Bush of "leading the world along for years."
Despite her criticism, Merkel however said she welcomed the fact that Bush had raised the issue of the prisons himself.
Merkel has enjoyed warm relations with the American president since succeeding Gerhard Schröder last year.