Merkel was in Russia to address an economic forum in St Petersburg hosted by Putin.
Russia's President Vladimir Putin presents Germany's Chancellor Angela Merkel with an old lithograph dedicated to the signing of a German-Russian trade agreement in 1894 at a press conference during an International Economic Forum in St Petersburg on June 21
Chancellor Angela Merkel told President Vladimir Putin on Friday that German art seized by the Soviets in the wake of World War II should be repatriated to Germany, a claim the Russian leader swiftly rejected.
The tense exchange took place as they opened an exhibition at the Hermitage museum in St Petersburg during a trip by Merkel to Russia. The exhibition about the Bronze Age includes 600 items carried off by the Soviet Union as war reparations, according to the German government.
Merkel said it was an important step that the works were now going on public display for the first time.
"It's our opinion that these exhibition pieces should be returned to Germany," she said.
Putin replied that it was time to stop making repatriation claims against each other, otherwise Turkey could also demand the return of art from Germany. He said it didn't matter to the average citizen if art is displayed in Berlin, St Petersburg, Moscow or in Turkey.
According to Berlin's Humboldt University, the Soviets plundered more than a million books and thousands of works of art at the end of the war.
Many pieces have still not been traced and it remains a touchy issue in both countries.
The Hermitage museum exhibition, The Bronze Age of Europe: Europe Without Borders, opens to the public on Saturday, the anniversary of the Nazi invasion of the Soviet Union.
According to the Hermitage website, the exhibition includes items from a collection known as Priam's Treasure, which were discovered by German archaeologist Heinrich Schliemann in the 19th century.
Earlier on Friday it had looked as if Merkel's trip to Russia was going to be eclipsed by a spat over the museum event when a German government spokesman in Berlin, Georg Streiter, said Russia had called off the event, arguing that "it was impossible for the host to find the time."
German media seized quickly upon the apparent last-minute change of schedule as a likely sign of deteriorating relations between the two countries, proclaiming an "uproar about looted art" and writing that "Putin is a miserable diplomat."
But Putin later dismissed the speculation of a bust-up and said the museum trip was going ahead. He said there had been some uncertainty over whether there would be time for the event.