"Chancellor Merkel is a worthy recipient in recognition of her continuing efforts of inter-communal harmony across Europe, her friendship towards the Jewish community and outstanding contributions to the promotion of tolerance and understanding," the CER`s president, Chief Rabbi Pinchas Goldschmidt, said in a statement.
Merkel referred in her acceptance speech to the murder of six million Jews instigated by Germany, calling the Holocaust a "break with civilization."
She stressed the right to religious freedom, referring to anti-Semitic comments that had arisen during a fierce recent debate in Germany over the Jewish and Muslim practices of circumcision.
"The fight against anti-Semitism is a paramount duty of a free democratic state," Merkel said, adding that it was important to invest in education to keep the memory of the Holocaust alive.
The chancellor also spoke about Germany`s friendship with Israel, and said a two-state solution remains an attainable goal in the Middle East, despite all setbacks.
Goldschmidt praised Merkel for her "principled leadership" and her stance during the debate on circumcision.
He said it had not been an easy decision to award the prize to a German chancellor, but said it was the "right decision."
The last recipient of the prize, which has been awarded since 2012, was the former president of the European Parliament and erstwhile Polish premier, Jerzy Buzek.
The award is named in honour of Lord Immanuel Jakobovits, a former CER president who "advocated religious commitment with unyielding love and consideration for his fellow man."
The chairman of Germany`s Central Council of Jews, Dieter Graumann, called Merkel`s support to the country`s Jewish community and her friendship towards Israel remarkable.
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