* Germany's Merkel demands action, not words
* Merkel says other EU states should join no-spying deal with U.S.
* Franco-German frustration could spur action on data privacy rules
By John O'Donnell and Luke Baker
BRUSSELS, Oct 24 (Reuters) - German Chancellor Angela Merkel demanded on Thursday that the United States strike a "no-spying" agreement with Berlin and Paris by the end of the year, saying alleged espionage against two of Washington's closest EU allies had to be stopped.
Speaking after talks with EU leaders that were dominated by allegations that the U.S. National Security Agency had accessed tens of thousands of French phone records and monitored Merkel's private mobile phone, the chancellor said she wanted action from President Barack Obama, not just apologetic words.
Germany and France would seek a "mutual understanding" with the United States on cooperation between their intelligence agencies, and other EU member states could eventually take part.
"That means a framework for cooperation between the relevant (intelligence) services. Germany and France have taken the initiative and other member states will join," she said.
In a statement issued after the first day of the summit, the EU's 28 leaders said they supported the Franco-German plan.
Merkel first raised the possibility of a "no-spying" agreement with Obama during a visit to Berlin in June this year, but nothing came of it. The latest revelations, part of the vast leaks made by former U.S. data analyst Edward Snowden, would appear to have renewed her determination for a pact.
The United States has a "no-spying" deal with Britain, Australia, New Zealand and Canada, an alliance known as "Five Eyes" that was struck in the aftermath of World War Two.
But there has traditionally been a reluctance to make similar arrangements with other allies, despite the close relations that the United States and Germany now enjoy.
Merkel said an accord with Washington was long overdue, given the shared experiences the countries face.
"We are in Afghanistan together. Our soldiers experience life threatening situations. They sometimes die in the same battles," she said.
"The friendship and partnership between the European member states, including Germany, and the United States is not a one-way street. We depend on it. But there are good reasons that the United States also needs friends in the world."
As EU leaders arrived for the two-day summit there was near-universal condemnation of the alleged activities by the NSA, particularly the monitoring of Merkel's mobile phone, a sensitive issue for a woman who grew up in East Germany, living under the Stasi police force and its feared eavesdropping.
Some senior German officials, and the German president of the European Parliament, have called for talks between the EU and United States on a free-trade agreement, which began in July, to be suspended because of the spying allegations.
Merkel, whose country is one of the world's leading exporters and stands to gain from any trade deal with Washington, said that was not the right path to take, saying the best way forward was to rebuild trust.
The series of Snowden-based leaks over the past three months have left Washington at odds with a host of important allies, from Brazil to Saudi Arabia, and there are few signs that the revelations are going to dry up anytime soon.
Britain's Guardian newspaper reported on Thursday that one NSA contact, a U.S. official, had provided the telephone numbers of 35 world leaders that had then been monitored.
As well as raising questions about the EU-US trade negotiations, the spying furore could also have an impact on data-privacy legislation working its way through the EU.
The European Parliament this week backed legislation, proposed by the European Commission in early 2012, that would greatly toughen EU data protection rules dating from 1995.
The new rules would restrict how data collected in Europe by firms such as Google and Facebook is shared with non-EU countries, introduce the right of EU citizens to request that their digital traces be erased, and impose fines of 100 million euros ($138 million) or more on rule breakers.
The United States is concerned the regulations, if they enter into law, will raise the cost of handling data in Europe. Google, Yahoo!, Microsoft and others have lobbied hard against the proposals.
Given the spying accusations, France and Germany - the two most influential countries in EU policy - may succeed in getting member states to push ahead on negotiations with the parliament to complete the new data regulations by 2015.
For the United States, it could substantially change how data privacy rules are implemented globally.