Merkel, in London for talks and a private dinner with British Prime Minister Tony Blair, said it was also vital to any new agreement to involve the United States, which did not ratify the 1997 accord to cut greenhouse gas emissions.

"Europe needs a strategy for the time once the Kyoto Protocol has elapsed in 2012.... We have to do everything in order to issue a wake-up call to all nations. Climate change is one of the great challenges of the 21st century," she said.

Persuade Washington that "this is a very important issue for all of us" was a critical task, she told a joint news conference.

For his part, Blair said it was important to create the right framework for international agreement and there was a "real opportunity" to make progress in the coming year when Germany takes over the European Union presidency.

He also said there was a "sense of hope" that the United States could be part of any new agreement, particularly with a growing, cross-party consensus in many US states about the need for clean energy.

The prime minister is keen to push the issues further up the agenda after his government published a major report Monday which said global warming could cost the world's economies up to 20 percent of their gross domestic product.

Former World Bank chief economist Sir Nicholas Stern's climate change report said combatting global warming would cost about one percent of GDP, 20 times less than the potential cost of doing nothing.

The report recommends a huge expansion of carbon-emissions trading networks such as that set up by the 25-nation EU bloc, which aim to limit pollution by allowing industries to buy and sell their emission rights.

Britain, which under Blair has become one of Europe's most deregulated economies, is keen to see the EU's carbon-trading market expanded to tie in with others around the world.

Merkel said Germany was interested in the contents of the Stern report but highlighted that there was "no real compatibility" with German efforts to tackle climate change and some existing EU rules.

Instead, "Europe-wide instruments" were needed, she added.

Blair and Merkel's talks also touched on the Middle East, Afghanistan -- where both countries have troops -- and NATO talks later this month in Riga.

Merkel told Blair that Germany could "take up where (Britain) left off" on certain issues, notably Africa, when it assumes the rotating presidency of the G8 group of industrialised nations in January.

On the Middle East, where German troops are part of the United Nations force policing the Lebanese ceasefire, Merkel said it was important to revive the peace process amid a bloody new wave of violence in the Gaza Strip.

And after it emerged that Blair sent a senior adviser to Syria this week, she agreed with her British counterpart that it was vital to involve Damascus in efforts to bring peace to the troubled region.

"We've got to give the Syrians a chance to show that they are ready to play a constructive role if they want to," she added.

On Afghanistan, she agreed with Blair that the military option to bring stability there was only one part of the solution.