Malaysian Foreign Minister Anifah Aman says the funding could be "seen as interference in the domestic affairs of a sovereign state" because the Malaysian government considers rights group Suaram to be politically biased.
Suaram often criticizes government policies on issues such as detention without trial.
A German Embassy official said the ambassador was meeting with Malaysian foreign ministry representatives Friday.
The official said German authorities approved a "small amount" of money two years ago to support a workshop on migration that involved participants including Suaram.
He spoke on condition of anonymity because he was not authorized to make public statements.