The seven-times Formula One world champion, back before his adoring home fans for what could be his last race at the German circuit, lapped in one minute 30.788 seconds.
Brazilian team mate Felipe Massa was second quickest, 0.305 seconds slower, with Schumacher's brother Ralf third in a Toyota.
Canadian Jacques Villeneuve, the former world champion whose first and last grand prix wins were at the Nuerburgring in 1996 and 1997, was fourth fastest for BMW Sauber.
Renault's world champion Fernando Alonso, 15 points clear of Schumacher after the German won the last race in Imola at Ferrari's home track, was sixth behind Italian team mate Giancarlo Fisichella.
The V10-powered Toro Rosso cars had a good session, with Italian Vitantonio Liuzzi ninth quickest and American Scott Speed 12th.
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Schumacher is chasing his second pole position in a row after taking a record 66th at the San Marino Grand Prix.
The big question for the weekend is whether his victory two weeks ago, with Ferrari showing a sudden improvement after a faltering start to the season, was truly representative of his team's pace.
Alonso has said he expects Mercedes-powered McLaren, with Finland's Kimi Raikkonen and Colombian Juan Pablo Montoya, to be bigger rivals this weekend.
Raikkonen, who led at the Nuerburgring until crashing out on the final lap with suspension failure last year, was only 10th fastest with Montoya 17th.
