The reason behind the demand was the museum's exhibition on Jerusalem, which "presents a Muslim-Palestinian perspective of the city," the report said.
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In the letter sent directly to the chancellor's bureau and not through the Israeli embassy, Merkel was asked to defund other organizations that it claimed were anti-Israeli.
These included the Berlin International Film Festival, pro-Palestinian Christian organizations, and the Israeli site +972 Magazine, which receives funding from the Heinrich Böll Foundation.
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While Die Tageszeitung did not have clear evidence that the letter was sent by Israeli officials, the German government confirmed that there were discussions between the two countries regarding funding of certain organizations, in line with Prime Minister Benjamin Netanyahu's ongoing policy.
In a response given to the Israeli newspaper Yedioth Ahronoth on Sunday, the Prime Minister's Office did not deny the request. "The prime minister raised the issue of defunding Palestinian and Israeli groups and non-governmental organizations that depict Israel Defense Forces as war criminals, support Palestinian terrorism and call for boycott of the State of Israel. Israel will continue fighting these organizations," read the statement.