In formal conclusions agreed by the 28 national leaders at a meeting that ended after midnight, Turkey was offered an accelerated path to giving its citizens visa-free travel to the EU, provided it met previously agreed conditions.
Progress would also depend on Ankara showing real help in slowing migration and would be reviewed next spring.
Merkel, who will visit Istanbul for talks with Erdogan on Sunday in a political gesture two weeks before a Turkish general election, said it was clear that Europe's efforts to filter and process refugees would not work without Turkey's cooperation.
"The hotspots alone won't solve the problem," she said.
French President Francois Hollande stressed that Turks would not be getting visas on easier terms. One condition still to be met is for Ankara to first stop granting such easy entry to Pakistanis, Afghans and others who end up heading to Europe.
It must also first sign and implement a previously agreed deal to take back from Europe migrants who fail to win refugee status. "There must be no misunderstandings," Hollande said.