By Noah Barkin and Madeline Chambers
BERLIN (Reuters) - An outraged Germany summoned the U.S. ambassador for the first time in living memory on Thursday over suspicions Washington bugged Chancellor Angela Merkel's phone, in the worst spat between the close allies in a decade.
Merkel, at a summit of European leaders in Brussels, said the incident had shattered German trust in the United States: "It's not just about me but about every German citizen," she said. "Spying among friends is not at all acceptable."
The White House did not deny the bugging, saying only it would not happen in future. President Barack Obama spoke with Merkel to assure her she was not now under surveillance.
Foreign Minister Guido Westerwelle suggested Washington may have deceived Berlin with assurances about the scope of its covert spying program, which was revealed earlier this year by fugitive former U.S. intelligence contractor Edward Snowden.
"In the summer, we received explanations and assurances," the German minister said. "Whether we can trust these explanations and assurances, that must be examined again."
He took the unusual step of making part of his statement in English - to make the message to Washington "quite clear".
Some politicians suggested the row could disrupt European Union negotiations with the United States on a free trade pact, though others played down that possibility.
State surveillance is a highly sensitive subject in a country haunted by memories of eavesdropping by the dreaded Stasi secret police in East Germany, where Merkel grew up.
The news shocked many Germans, coming just four months after Obama visited Merkel in Berlin on the 50th anniversary of John F. Kennedy's famous "Ich bin ein Berliner" speech. Obama then praised Germany as one of Washington's closest partners.
Some Germans said they viewed such eavesdropping as a betrayal by the country that did most to defend democratic West Germany from Soviet-backed communism during the Cold War.
"This is not how you should treat your partners," said Stephanie Hilebrand, 38, as she walked by the Brandenburg Gate, once a forlorn landmark in the shadow of the Berlin Wall.
"We're not terrorists. Nor is our chancellor."
FREE TRADE DEAL
Evidence of the spying was uncovered by German weekly Der Spiegel, which according to officials, obtained an NSA document with Merkel's mobile phone number on it and showed it to her office, which had it vetted by German intelligence.
They concluded that the document was credible, leading Merkel to confront Obama about it in a phone call on Wednesday.
The response did not reassure the Germans. All the White House would say is that it "is not monitoring and will not monitor" Merkel's communications. It did not deny that the chancellor may have been spied on in the past.
"We are not going to comment publicly on every specified alleged intelligence activity," a White House spokesman said.
Merkel said: "We need to have trust in our allies and partners and this trust must now be established once again."
Sigmar Gabriel, head of the Social Democrats (SPD) whose party is in coalition talks with Merkel's conservatives, said it was difficult for him to imagine continuing negotiations on a free trade deal between the European Union and the United States as long as the rights of citizens in Europe were endangered.
Others were more measured. Merkel's chief of staff, Ronald Pofalla, said Germany would demand a "no-spy deal" with Washington, which would set out rules for cooperation between their intelligence services.
Defence Minister Thomas de Maiziere told German television that the Americans remained Germany's best friends but described the phone hacking as a "no go".
The incident is a trial by fire for U.S. ambassador John Emerson, who arrived in Berlin just two months ago.
German media reports said domestic security sources believed the embassy had played a role in the monitoring of Merkel's phone, which is said to have taken place over a period of years. No one at the embassy was available to comment.
The German foreign ministry was unable to tell Reuters the last time a U.S. ambassador was summoned to speak with the German foreign minister, the strongest signal of displeasure in the diplomatic playbook short of being ordered to leave.
"There are no statistics on this," a spokeswoman said. "We definitely cannot recall summoning this partner in the recent or medium-term past."
Not since Merkel's predecessor Gerhard Schroeder opposed the U.S.-led invasion of Iraq in 2003 has the tension between Europe's leading economic power and Washington been so high.
Many politicians said the row could upset relations between Obama and Merkel, who come from opposing political camps and who, diplomats say, have respectful but sometimes strained ties.
"This could be a problem for the personal relationship - at least it certainly would do if it was me," Elmar Brok, a German conservative who sits in the European Parliament, told Reuters.
The two got off to a bad start in 2008 when Merkel denied Obama, then a mere presidential contender, the right to make a speech at the Brandenburg Gate, a symbol of reunited Germany.
Although the leaders met several times in other places, it took Obama 4-1/2 years to make a presidential visit to Berlin.
Under Merkel, Germany caused frustration in Washington by refusing to back Western intervention in Libya and Obama has expressed frustration with her management of the euro crisis.
The new revelations overshadowed a meeting of EU leaders in Brussels that started on Thursday. France had pushed for the issue to be put on the summit agenda after a report earlier in the week that U.S. agents spied extensively on French citizens.
However, some lawmakers said it was in Germany's interests to ensure the EU-U.S. free trade deal remained on track.
"I don't think we would improve things if we suspended them," said Wolfgang Bosbach, a lawmaker from Merkel's Christian Democrats. "It is important to continue the talks swiftly, and that we reach agreements."
Business groups also urged the government to continue the talks.
"Political standstill in the United States and growing mistrust should not block the free trade deal," said Markus Kerber, head of the BDI industry association.
(Additional reporting by Alexandra Hudson and Andreas Rinke; Editing by Alastair Macdonald)