Mrs Merkel made the comments at a German business conference in Frankfurt.
She said: “We don’t want these negotiations to collapse.
“But we also can’t fully rule that out because we still have no agreement.”
The direct intervention from Ms Merkel, who until recently had largely kept quiet on the Brexit talks, is another sign that the negotiations are entering a crucial phase.
However Mrs Merkel also claimed: “We will use all our force and creativity to make sure a deal happens.”
The EU summit in Salzburg, due to take place on September 19 and 20, is expected to be highly contentious.
According to The Guardian, the other EU member states will use a “carrot and stick” approach to getting concessions.
They will complement the Chequers deal, but also demand the UK explains its plans for the Northern Irish border in more detail.
However it is likely the EU will also demand more concessions which could infuriate Brexiteers.
The move could be dangerous for Mrs May, coming just weeks before the Conservative Party Conference.
Earlier this week the EU’s chief negotiator Michel Barnier said he was “strongly” opposed to the proposed deal.
He told a German newspaper it would “be the end of the single market and the European project” if accepted.
Top Brexiteer Jacob-Rees Mogg, who meet Mr Barnier in Brussels on Monday, supported the assessment saying the two men “found ourselves in considerable agreement that Chequers is absolute rubbish and we should chuck it and have a Canada style trade deal instead”.
He added Mr Barnier was: “As you would expect, extraordinarily charming.”
The Prime Minister reportedly told Cabinet on Tuesday the European reaction to her suggested deal was “warm and positive”.
Mrs May visited a number of EU member state leaders over the summer, creating suspicions that she is trying to negotiate with national leaders rather than the more hardline European Commission.
A spokesman for the Prime Minister did not deny the tactic, saying: “You have seen a lot of personal involvement from the Prime Minister in terms of the meetings she has held with her various summit which we have been attending recently.”
It comes as a Sky Data poll showed that 52 percent of Brits disapprove of the Chequers deal.
Only 18 percent approve, whilst 30 percent are unsure.