Nearby in central Berlin, a similar number of people joined a counter-rally chanting "There is no right to Nazi propaganda." A major anti-racism rally was also held in the southern German city of Munich.
Merkel's decision in 2015 to admit more than a million migrants and asylum seekers, mostly Muslims fleeing conflicts in the Middle East, has deeply split Germans, who on October 3 mark the Day of German Unity - the day in 1990 when the four-decade division into communist east and capitalist west ended, Presstv Reported.
The far-right protesters chanted "We are the people" - the slogan used by East German protesters 29 years ago to signal their rejection of the communist government in rallies that culminated in the fall of the Berlin Wall and reunification
"We are the extra-parliamentary resistance," one speaker said, while another read out an appeal for help to "save the country" in Russian, English, French, Italian and Dutch.
Protests were also expected later on Wednesday in the eastern city of Cottbus.
Anti-immigrant sentiment and support for far-right parties such as Alternative for Germany are particularly strong in eastern Germany, where living standards continue to lag those in the west despite decades of large-scale public investment.
"We now know that what we call German unity is a process," said Merkel, herself an "Ossi" from the East, at a Berlin commemoration, acknowledging that the optimism of reunification had not prepared many for the hard slog of reconstruction.
"This is a long journey that demands of us all that we listen to each other, approach each other, never to become complacent," she added.
Tensions in eastern Germany have been running especially high since the fatal stabbing of a German man by two migrants from the Middle East in August, which triggered weeks of protests and counter-protests and prompted deep soul-searching among Germans.