In the Baltic city of Stralsund, the two leaders celebrated an increasingly close friendship symbolically cemented here with a gift of herring to Mr Bush and a shared barbecue of roast boar.
Mr Bush said he will send a clear message to Russian President Vladimir Putin that he is concerned about freedoms in Russia.
"Our job is to continue to remind Russia if she wants to continue to have good relations she needs to share common values," he said.
At a joint public appearance, the two leaders accused the Lebanon-based Hezbollah movement of sparking some of the worst Middle East violence in 10 years by abducting Israeli soldiers and firing rockets at targets inside Israel.
They also jointly warned Iran that they were taking the dispute over Tehran's nuclear program to the UN Security Council and urged the Islamic republic to freeze sensitive atomic activities as a precondition for talks.
The meeting came a day before Mr Bush heads to Russia for weekend talks with President Putin and the July 15-17 Group of Eight summit of industrialised nations.
"I'll be firm in my beliefs in certain democratic institutions, I'll be firm in my belief about the need for there to be an active civil society, and NGOs should be allowed to function in Russia without intimidation," he said.
Ms Merkel urged Russia to ratify the International Energy Charter, giving greater access to pipelines and energy supplies, which she said would provide "greater security" to world energy supplies.
"We have different ideas about how a pluralist society, a democratic society ought to work; that there ought to be a strong opposition is certainly one of the realities of life," said the German chancellor.