Speaking to the Bild am Sonntag newspaper, Steinmeier said last month's poisoning of a former Russian spy in England, which Britain and its allies blame on Moscow, was "a very serious incident".
"But we should be at least as worried about the galloping alienation between Russia and the West, the consequences of which stretch far beyond this case," the former foreign minister said.
A dispute over Western intervention in Syria has dramatically added to the tensions in recent days.
Steinmeier said while it was right to show Russia its actions have consequences, as demonstrated by the sanctions imposed over the annexation of Crimea and the conflict in Ukraine, "we can't abandon direct dialogue".
He also cautioned against demonising an entire nation.
"Independently of Putin, we can't declare the whole of Russia, the country and its people, as our enemy," he said, warning there was "too much at stake".
On Syria, Steinmeier said there could be no improvement on the ground until US President Donald Trump and his Russian counterpart Vladimir Putin engaged with each other in a constructive manner to try to negotiate a solution.
"Of course you can't do it without the regional neighbours in the end, but everything begins with the US and Russia," he was quoted as saying.
"Putin and Trump owe it to the world to take the first step."