The envoy was called home after the two met ahead of a controversial U.N. conference on racism being boycotted by several countries, including Israel and the United States.
Israel "decided to recall the Israeli ambassador in Switzerland Ilan Elgar for consultations to express their discontent over the holding of the Durban II conference in Geneva that includes the participation of a racist Holocaust denier who has publicly declared his intention to wipe Israel off the map," a government statement said.
"Israel's ambassador in Switzerland is recalled for consultations following the start of the Durban II conference and the meeting between the Swiss president with his Iranian counterpart," a foreign ministry official said.
"This is not a break in relations, but an expression of Israel's discontent for the lax Swiss attitude towards Iran," he said on condition of anonymity.
Merz met Ahmadinejad on Sunday night ahead of Monday's opening of the five-day meeting.
"I feel deeply hurt and ashamed that on such a day, there is the opening of a racist conference in Geneva, and the main speaker is who? Mahmoud Ahmadinejad. A man that calls to wipe Israel off of the map. A man who denies the Holocaust," Israeli President Shimon Peres said in a statement.