BRUSSELS—A cease-fire between Ukrainian troops and Russia-backed rebels in eastern Ukraine isn’t being fully observed and thus European Union sanctions against Russia must remain in place, German Chancellor Angela Merkel told reporters early Friday morning.

Ms. Merkel is a decisive figure in European decisions on sanctions against Russia, in part because of Germany’s close economic ties with Europe’s giant eastern neighbor. Her remarks show that tensions over Ukraine are far from being defused, despite the cease-fire deal...