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By Maria Sheahan and Alexei Anishchuk

HANOVER, Germany (Reuters) - Russian President Vladimir Putin arrived in Germany on Sunday to protests over his human rights and democracy record and a warning from German Chancellor Angela Merkel that Russia needed an active civil society to flourish.

Putin's visit to Germany and the Netherlands, Moscow's biggest trade partners in Europe, was supposed to focus on trade but comes at an awkward time after a wave of state inspections of foreign-funded non-governmental organizations (NGOs) in Russia, much criticized abroad.

In her address at the opening of an industrial fair spotlighting Russian business, Merkel told Putin Russia was propped by its raw material deposits and huge investment in infrastructure but Germany could help it in its aims to innovate and diversify.

"We believe this can happen most successfully when there is an active civil society," she said.

"We must intensify these discussions, develop our ideas, and we must give the NGOs, who we know as a motor for innovation, a good chance in Russia," she added to strong applause.

Germany and the Netherlands need Russia for energy and as a market for exports ranging from Volkswagen Touaregs to tulips, but are uneasy about the influence its oil and gas give it and about Putin's treatment of opponents and activists in his new Kremlin term.

Merkel had come under pressure at home to voice her concerns to Putin, not only on the inspections of NGOs, but also on their differences over Syria's civil war and Russian criticism of the German-orchestrated financial bailout of Cyprus. Her talks with Putin would include "controversial subjects" she told reporters on the sidelines of the fair.

In his address to the trade fair Putin focused on Russia's economic strength, noting, "despite global disarray and the global financial crisis, our country has continued to develop positively."

Outside hundreds of protesters gathered, many carrying Syrian flags, others wearing devil masks or waving images of Putin dressed in a prisoner's striped uniform. "Stop political terror," read one banner.

In an earlier interview with German broadcaster ARD, Putin had dismissed criticism of the NGO inspections and said they would not cast a shadow over the visit, echoing his repeated rejection of Western worries about his domestic policies.

Putin - a former Soviet KGB officer who was stationed in East Germany, where Merkel grew up - has accused Western states of using NGOs to spy on Russia and influence politics.

He said in the interview that Russians have a right to know which NGOs are foreign-funded "and for what purposes".

He sent warmer signals on economic issues, expressing confidence in the euro and toning down criticism of the Cyprus bailout by saying he hoped more money would flow into Russia as a result.

(Writing by Alexandra Hudson; Editing by Stephen Powell)

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