"There is another step that needs to be taken because neither Germany nor Sweden can determine the number of refugees given that it stems from the situation (on the ground)," said Merkel at a press conference in Berlin following her discussions with Sweden's Prime Minister Stefan Löfven.
Merkel added that "we need an open system to share out those with a right to asylum"
Löfven told reporters: "We have agreed to continue to push for a reformed European refugee policy. All countries must take full responsibility to help people who have been displaced".
According to Juncker's proposal for mandatory quotas for EU states which is set to be unveiled Wednesday, Germany and France would take about half of the 120,000 refugees to be relocated from frontline states.
Merkel said the so-called Dublin 3 rule -- which requires the first EU port of entry to process asylum claims -- "no longer works" as it means that both Italy and Greece are left to take in the bulk of Europe's refugee influx.
"We must discuss a new asylum policy," she added.
Berlin has already stopped applying the rule for Syrians, and is allowing citizens of the war-torn country to apply for asylum in Germany regardless of their first port of arrival in the EU.
"I'm seldom so convinced that this task will also determine Europe's future and whether the continent really accepts the value...of individual freedom," Merkel said.
"On this question, the whole world is watching. And we're not just saying Syria is so far away from us. Rather, we're simply taking care of the problem," she added.
Löfven had said ahead of the talks that he was "concerned" that some EU countries were still "shirking their responsibility" to take in refugees.
"Sweden and Germany are the countries in the EU that take in the largest share of refugees and advocate a common system of binding quotas, which all EU countries must follow," he said on Monday.
But at the press conference on Tuesday he warned against squabbling between European countries.
"We should not primarily seek to punish or attack the other member states," he said.
Sweden's Prime Minister has announced that he will hold talks on the refugee crisis on Thursday with all of the country's political parties, except for the nationalist Sweden Democrats.