Islamist terrorism is the biggest test facing Germany, Chancellor Angela Merkel said on Saturday in a New Year's address to the nation, and she vowed to introduce laws that improve security after a deadly attack before Christmas in Berlin.

Describing 2016 as a year that gave many the impression that the world had "turned upside down," Mrs Merkel urged Germans to forsake populism and said Germany had an interest in taking a leading role in addressing the many challenges facing the European Union.

"Many attach to 2016 the feeling that the world had turned upside down or that what for long had been held as an achievement is now being questioned. The European Union for example," Mrs Merkel said.