Foreign Minister Sigmar Gabriel said it was "quite unrealistic" to believe Germany would spend 2% of its economic output on the military.
Other spending such as development aid, he said, should be taken into account.
However, Nato chief Jens Stoltenberg echoed US calls for member states to pay an equal proportion.
"Diplomacy, development aid, economic co-operation can be important to help stabilise a region," Mr Stoltenberg told a news conference after Nato talks in Brussels.
"We have international targets, guidelines, for development aid, 0.7% of GDP [gross domestic product], and then we have a Nato agreement on moving towards 2%. But those are two different things... It is not either development or security, it is development and security."
US Secretary of State Rex Tillerson told his counterparts in Brussels that by the next Nato summit - to be held in Brussels in less than eight weeks' time - there should be a commitment to produce clear plans to demonstrate how each country would meet its spending commitments.
"As President [Donald] Trump has made clear, it is no longer sustainable for the US to maintain a disproportionate share of Nato's defence expenditures," he said.
The meeting of Nato foreign ministers, originally scheduled for next week, was brought forward to suit Mr Tillerson's schedule.
According to Nato's 2016 annual report, only five countries met the 2% target - the US, the UK, Greece, Poland and Estonia. By contrast, Germany spent 1.2% on defence.
However, according to latest OECD available figures based on gross national income, Germany spent more in relative terms on overseas development aid in 2015 than the US - 0.52% of GNI compared with 0.17% for America.