The two-day meet in Brussels is shaping up as the alliance s most difficult in years, with Europe and the US engaged in a bitter trade spat and Trump demanding that NATO allies "reimburse" Washington for the cost of defending the continent.
Merkel shot back that Germany had the right to make its own policy choices, setting up an explosive one-on-one meeting with Trump later in the afternoon.
European alliance members were braced for criticism from Trump on defence spending, but his blistering attack on Germany at a breakfast meeting with NATO chief Jens Stoltenberg took the summit by surprise.
"Germany is a captive of Russia because it is getting so much of its energy from Russia," Trump said, taking particular aim at the proposed Nord Stream II gas pipeline, which he has previously criticised.
"Everybody s talking about it all over the world, they re saying we re paying you billions of dollars to protect you but you re paying billions of dollars to Russia."
Merkel, who grew up in Soviet-dominated East Germany, ramped up the febrile atmosphere of the summit with a sharp reply on arriving at NATO HQ.
"I myself have also experienced a part of Germany being controlled by the Soviet Union," she said.
"I am very glad that we are united today in freedom as the Federal Republic of Germany and that we can therefore also make our own independent policies and make our own independent decisions."
Trump has long complained that European NATO members do not pay enough for their own defence, accusing them of freeloading on America and singling out Germany for particular criticism.
NATO allies agreed at a summit in Wales in 2014 to move towards spending two percent of GDP on defence by 2024. But Germany, Europe s biggest economy, spends just 1.24 percent, compared with 3.5 percent for the US.
"These countries have to step it up -- not over a 10 year period, they have to step it up immediately," Trump said.
"We re protecting Germany, France and everybody... this has been going on for decades," Trump said. "We re not going to put up with it, we can t put up with it and it s inappropriate."
Stoltenberg acknowledged that Trump had expressed himself in "very direct language" but insisted that away from the fiery rhetoric the allies all agree on fundamental issues: the need to boost NATO s resilience, fight terror and share the cost of defence more equally.
Canadian Prime Minister Justin Trudeau, whose country also lags on the two percent pledge, said the focus should be on "outputs" rather than on how much is spent.
NATO officials and diplomats will try to promote an image of unity at the summit in the face of growing unease about the threat from Russia, but with the row between Merkel and Trump it may prove difficult to paper over the cracks.
The mercurial tycoon said before leaving Washington that his meeting in Helsinki with Russian President Vladimir Putin on Monday "may be the easiest" part of his European tour, which also includes a trip to Britain, where the government is in crisis over Brexit.
Trump ramped up his rhetoric ahead of the talks, explicitly linking NATO with the transatlantic trade row by saying the EU shut out US business while expecting America to defend it.
EU President Donald Tusk stepped up to the fight with his own salvo against Trump on Tuesday, telling him to "appreciate your allies" and reminding him Washington that Europe had come to its aid following the 9/11 attacks.
"Please remember this tomorrow when we meet at the NATO summit, but above all when you meet President Putin in Helsinki. It is always worth knowing who is your strategic friend and who is your strategic problem," he said.
Trump will meet the Russian leader in the Finnish capital on July 16 for their first summit amid an ongoing investigation in the US into possible Trump campaign collusion with Russia.
European diplomats fear a repeat of last month s divisive G7 in Canada, when Trump clashed with his Western allies before meeting North Korean dictator Kim Jong Un at a summit and praising him as "very talented".
There have been fears that Trump, keen to be seen to make a breakthrough with the Kremlin strongman, might make concessions that would weaken Western unity over issues such as Ukraine and Syria.
US ambassador to NATO Kay Bailey Hutchison urged allies to look beyond Trump s rhetoric and focus on the summit declaration -- which the US is expected to back -- which will be the basis for the alliance s work over the coming years.
And she said she expected Trump to recommit to one of the founding articles of NATO -- Article 5 -- which holds that an attack on one member is an attack on them all.
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