The far-right movement PEGIDA called for demonstrations for a second straight day after a gathering of around 800 people in the city of Chemnitz in the country's ex-communist east degenerated into violent chaos, forcing police to call in reinforcements.
Several media outlets, including the Bild tabloid, reported that some demonstrators Sunday had shouted "we are the people", "get lost" and "you're not welcome here" at those they took to be immigrants.
Prosecutors said Monday that police had arrested a 23-year-old Syrian man and an Iraqi man, 22, on suspicion they had stabbed to death the 35-year-old German man in an altercation in the early hours of Sunday.
"The investigation, especially into the motive, the details of the crime and the murder weapon continue," they said in a brief statement.
In the far-right riots that followed, some protesters used bottles to attack foreign-looking people, freelance journalist Johannes Grunert, who reports frequently on the far-right scene, told Spiegel Online.
Merkel's spokesman Steffen Seibert stressed Berlin's strong condemnation of the violent protests.
"Such riotous assemblies, the hunting down of people who appear to be from different backgrounds or the attempt to spread hate in the streets, these have no place in our country," he said.
Asked about an apparent call by an MP from the far-right AfD party for vigilante action, Seibert warned that it is the legal system that delivers justice in a constitutional democracy.
AfD lawmaker Markus Frohnmaier had written on Twitter: "If the state can no longer protect the citizen, then people will go on the streets and protect themselves."
In the violent altercation at 3am Sunday, on the sidelines of a street festival, two other men, aged 33 and 38, were hospitalised with severe
injuries, police said.
After the street demonstrations that followed on Sunday, Chemnitz mayor Barbara Ludwig said that "if I look at what has happened here on Sunday, I'm horrified".
"The fact that people can agree to meet... run through town and threaten people is bad," she told regional broadcaster MDR.
As outrage grew over the scenes of xenophobic violence by the mostly male protesters, left-leaning activists called for a counter-protest on Monday in the city, hours before PEGIDA supporters were due to gather.
In its call for a demonstration at 6:30 pm (1630 GMT), PEGIDA's Chemnitz and West Saxony regional chapter said: "Muster strength from anger and sadness! Only together can we ensure that his death was not pointless."
Saxony state has become a hotspot for racist hate crimes, as misgivings run deep in the region against the arrival of more than a million asylum seekers to Germany since 2015.
The state is also the birthplace of the Islamophobic PEGIDA movement, which is linked to the AfD -- a party that has scooped up voters who blame Merkel for the migrant influx.
Surveys suggest the AfD is on track to become the second biggest party in Saxony when regional elections are held there next year.
Results of last year's general election showed that in Chemnitz itself the AfD has as many voters as Merkel's centre-right CDU.