But German chancellor Mrs Merkel warned her against the move, saying Britain would pay the “price” by taking control of its borders.
And she insisted the EU would consider the views of Remain voters when Brexit negotations finally get underway later this year.
She said: “If the British government ends the free movement of people, that will have its price. That’s not malice.
“But they cannot say there will be an upper limit of 100,000 or 200,000 EU citizens, no more – this will not work.”
Mrs Merkel also urged the UK to maintain a “level playing field” with the bloc to avoid harming businesses and workers.
The controversial comments, made at the L20 trade union summit in Germany, are likely to anger Mrs May.
The Prime Minister recently attacked Brussels’ stance on Brexit, claiming some Eurocrats want the upcoming divorce talks to fail.
Speaking last month, she warned: “There are some in Brussels who do not want these talks to succeed, who do not want Britain to prosper.”
Mrs May will unveil her post-Brexit immigration policy when the Tory election manifesto is released tomorrow.
Earlier this week Jeremy Corbyn vowed to impose a system of “managed migration” if elected to Downing Street.
The Labour leader added: “Clearly the free movement ends when we leave the European Union.”
Meanwhile the Liberal Democrat manifesto vows to guarantee the rights of EU migrants living in the UK after Brexit.
The document, released today, also criticises “the abuse of refugees” and “toxic rhetoric on immigration and about immigrants themselves”.
It states: “We will not let campaigners for a hard Brexit pretend that racism and discrimination are a kind of patriotism.”