Abbas, on a European tour to build support for an eventual lifting of a crippling international aid embargo, said Palestinians were suffering under the cutoff, but held out a vague hope that the new government will satisfy the donors' conditions.
Merkel, whose country holds the rotating EU presidency, said the power-sharing deal reached between Abbas' Fatah faction and Hamas was positive because it stopped the fighting between the two that cost some 130 lives.
"It is good that the bloodletting, especially in Gaza, has been stopped but there is a difficult stretch in front of us," Merkel said after meeting with Abbas in Berlin.
But she returned to the conditions imposed by the Quartet of Middle East peace negotiators - from the EU, United Nation, United States, and Russia - that any new government must give up violence, recognize Israel and accept existing agreements reached with Israel. The power-sharing deal skirts those issues, and Hamas still refuses to recognize Israel.
Abbas met with Merkel in an effort to drum up support for the unity government deal after talks with British Prime Minister Tony Blair in London on Wednesday.
Abbas, who also met on Thursday with Foreign Minister Frank-Walter Steinmeier, expressed optimism that the boycott would be at least softened by the time the Middle East Quartet - the U.S., U.N., EU and Russia - hold their next meeting on the Israeli-Palestinian conflict.
"Regarding the boycott, we are very close to the European Union, and also as regards the Quartet, we think that by the next meeting things will be still clearer," Abbas told journalists after meeting Steinmeier.
Meanwhile, foreign ministers of seven Muslim countries and the chief of the Organization of the Islamic Conference will meet in Pakistan this weekend to prepare for an Islamic summit aimed at ending turbulence in the Middle East.
The idea for a summit of the Islamic countries has been championed by Pakistani President Pervez Musharraf who has long said the Palestinian conflict was the root of terrorism and extremism.
Musharraf, whose government does not recognize Israel but has held talks with it, has expressed gloom about the problems besetting the region and has urged a new initiative.
"Whether it is Iraq or Lebanon, or Palestine or Afghanistan, we seem to be sliding downwards. We don't see any light. We are not moving towards improvement and solutions," Musharraf told a recent news conference.
"So we thought that we must take action to turn the tide ... so at least some light is visible at the end of the tunnel."
Indonesia invites Hamas and Western envoys for talks
Indonesia has invited Hamas and Western representatives to talks in Jakarta next month in a bid to persuade the militant group to moderate its position and help end a crippling economic blockade of the Palestinian government.
Indonesia has received assurances from Syrian-based Hamas leader Khaled Meshal that he would send envoys to Jakarta for the talks, foreign ministry spokesman Desra Percaya said.
"We want to hear from Hamas their views on solving the Palestinian-Israeli issue and outside parties have yet to hear directly from them what it is that they want," Percaya told a news conference.
He did not give an exact date for the meeting but said it would take place before the end of March.
Percaya said despite the formation of a Palestinian unity government, the meeting remained relevant because issues surrounding Western demands for Hamas to renounce violence, recognize Israel and accept interim peace deals with Israel would not be resolved any time soon.
Indonesia, the world's most populous Muslim country, is a strong supporter of the Palestinian struggle for nationhood and has no diplomatic ties with Israel.
Percaya said Indonesia had also invited "individuals" from Europe and the United States to participate in the talks and hoped that a Western recognition of the Palestinian unity government would ease the economic blockade. He did not say whether the Western representatives had accepted the invitation.
Western diplomats have said the agreement between Hamas and Palestinian Authority Chairman Mahmoud Abbas's Fatah faction widened divisions within the Quartet of Middle East negotiators - the United States, the European Union, Russia and the United Nations.
The unity government agreement, which calmed weeks of factional warfare that killed more than 90 Palestinians, contained a vague promise to "respect" previous Israeli-Palestinian agreements.
But it fell short of meeting the Quartet's demands for Hamas to renounce violence and recognize Israel.
Hamas took control of the Palestinian government in March after winning parliamentary elections.
The U.S.-led boycott of the Hamas-led government has pushed the Palestinian Authority to the brink of financial collapse and raised poverty rates in the Gaza Strip and occupied West Bank.
A report by the United Nations World Food Program, released on Thursday, estimated that nearly half of Palestinians were unable to produce or access the food they needed