Germany's planned tax cuts could stabilize domestic demand and help stimulate the European economy, Chancellor Angela Merkel said on Thursday, noting the country was feeling the effect of economic collapse in southern Europe.

"It is our job to stimulate the European economy, including with planned tax cuts," she said at a press conference in Berlin with Hungary's Prime Minister Viktor Orban.

"We are trying hard to continue growth and keeping domestic demand high to import goods from other euro zone countries," she said.

Germany's upper house of parliament in May rejected government plans to reduce taxes by about 6 billion euros, which the opposition said would be irresponsible at a time of budget consolidation.

Asked about a demand by the International Monetary Fund that Greece be given more time to meet bailout conditions, Merkel said she would base her judgment on the report by the "troika" of international lenders.

(Reporting by Erik Kirschbaum and Andreas Rinke)