The Finn, three points adrift of Ferrari's world champion after the German took back the lead in Canada two weeks ago, lapped his rival's home track in one minute 29.989 seconds.
Schumacher, chasing his fifth win of the year on Sunday and his 50th for Ferrari to become the first driver to score 1,000 championship points, was second quickest with a time 0.364 slower than the McLaren.
"The car has been good and the tyres were really good, I'm quite happy to be first on Friday," said Raikkonen, who got his lap in before the skies opened and drenched the circuit for the later runners.
Colombian Juan Pablo Montoya and his Williams team mate Ralf Schumacher were third and fourth fastest respectively with Brazilian Rubens Barrichello, winner at the Nuerburgring last year, fifth for Ferrari.
Briton David Coulthard was sixth for McLaren.
REGAIN INITIATIVE
Raikkonen left no doubt about his intentions to regain the initiative in what is also a home race for his team's engine partners Mercedes.
The Nuerburgring's capricious climate favoured the front-runners.
Rain began to fall after the top 10 had lapped, the deteriorating conditions leaving the tail-enders on extreme weather tyres and with no hope of coming close to the earlier times.
With spray billowing out behind and rain reducing visibility, some of the later drivers lapped more than 27 seconds slower than Raikkonen, who starts last in Saturday's decisive session.
Australian Mark Webber struggled to keep his Jaguar on the slippery circuit and Brazilian Cristiano da Matta, for Toyota, and BAR's former champion Jacques Villeneuve failed to clock times after spinning.
Canadian Villeneuve skidded off into the gravel trap, halting the session to allow marshals to remove his car -- the second race in a row that he has failed to finish a Friday qualifying lap.
France's Olivier Panis, who gave the Cologne-based Toyota team a boost with the fastest time in free practice for their local race, finished a disappointing 17th.
