* Paris, Berlin discuss U.S. spying issue on sidelines of EUsummit
* Merkel says told Obama: "Spying on friends unacceptable"
* Germany says it has evidence Merkel's mobile "monitored"
* EU frustration could spur action on data privacy rules
By Luke Baker and Andreas Rinke
BRUSSELS, Oct 24 (Reuters) - German Chancellor Angela Merkelaccused the United States of an unacceptable breach of trust onThursday after allegations that the U.S. bugged her personalmobile phone, and she indicated data agreements with Washingtonmay have to be revised.
Arriving for a two-day summit in Brussels overshadowed bythe allegations of eavesdropping by the U.S. National SecurityAgency against Italy, France and Germany, Merkel said she hadtold President Barack Obama in a telephone conversation late onWednesday that the acts were unacceptable.
"It's not just about me but about every German citizen. Weneed to have trust in our allies and partners, and this trustmust now be established once again," she told reporters afterarriving in a car with '007' in the numberplate.
"I repeat that spying among friends is not at all acceptableagainst anyone, and that goes for every citizen in Germany."
The stern words were her first public pronouncement afterthe German government said on Wednesday it had evidence thechancellor's mobile was "monitored" by the NSA. Germany'sforeign minister summoned the U.S. ambassador to Berlin todiscuss the issue, an event diplomats said was almostunprecedented in the past 60 years.
White House spokesman Jay Carney said Obama had assuredMerkel in their telephone call that the United States "is notmonitoring and will not monitor" her communications, leavingopen the possibility that it had happened in the past.
The affair dredges up memories of eavesdropping by the Stasisecret police in the former East Germany, where Merkel grew up,and is an emotive topic for many Germans.
Following the unceasing flow of leaks by former U.S. dataanalyst Edward Snowden, which has revealed the vast reach of theNSA's spy programmes, Washington finds itself at odds with ahost of important allies, from Brazil to Saudi Arabia.
Britain's Guardian newspaper reported on Thursday that oneNSA contact, a U.S. official, had provided the telephone numbersof 35 world leaders that had then been monitored.
Germany's frustration follows outrage in France after LeMonde newspaper reported the NSA had collected tens of thousandsof French phone records between December 2012 and January 2013,and an Italian news magazine reported on Thursday that the NSAhad monitored sensitive Italian telecommunications.
The revelations could have an impact on major legislativeand trade initiatives between the United States and the EuropeanUnion, with some German lawmakers saying negotiations over anEU-U.S. free-trade agreement should be suspended.
Merkel, who has previously discussed a "no spying" agreementwith the United States, hinted that data-sharing deals withWashington may need to be reexamined, a potentially damagingblow for U.S. efforts to collect counter-terrorism information.
"To this end, we need to ask what we need, which datasecurity agreements we need, what transparency we need betweenthe United States of America and Europe," Merkel said.
"We are allies facing challenges together. But such analliance can only be built on the basis of trust."
While Berlin and Paris are likely to find sympathy among theEU's 28 member states, domestic security issues are not acompetence of the European Union. The best that may be hoped foris a public expression of support from leaders and calls for afull explanation from the United States.
On their way into the summit, several European leaders didexpress their shock and surprise at the allegations.
"This is serious," said Dutch Prime Minister Mark Rutte.
"I will support (Merkel) completely in her complaint and saythat this is not acceptable. I think we need all the facts onthe table first."
DATA PRIVACY RULES
The most immediate impact of the furore could be toencourage member states to back tougher data privacy rulescurrently being drafted by the European Union. The EuropeanParliament this week backed legislation that would greatlytoughen EU data protection rules that date from 1995.
The new rules would restrict how data collected in Europe byfirms such as Google and Facebook is shared with non-EUcountries, introduce the right of EU citizens to request thattheir digital traces be erased, and impose fines of 100 millioneuros ($138 million) or more on rule breakers.
The United States is concerned that the regulations, if theyenter into law, will raise the cost of handling data in Europe.Google, Yahoo!, Microsoft and othershave lobbied hard against the proposals.
Given the spying accusations, France and Germany - the twomost influential countries in EU policy - may succeed in gettingmember states to push ahead on negotiations with the parliamentto complete the data regulations and make them more rigid.
For the United States, it could substantially change howdata privacy rules are implemented globally.
It may also complicate relations between the United Statesand the EU over an agreement to share a large amount of datacollected via Swift, the international system used fortransferring money electronically, which is based in Europe.
Among the revelations from Snowden's leaks is that theUnited States may have violated the Swift agreement, accessingmore data than it was allowed to.
The European Parliament voted on Wednesday to suspend Swift,and the spying accusations may make EU member states support afirmer line, complicating the United States' ability to collectdata it says is critical in combating terrorism.
Despite the outrage in Paris and Berlin, the former head ofFrance's secret services said the issue was being blown out ofproportion and no one should be surprised by U.S. spying.
"I'm bewildered by such worrying naiveté. You'd think thepoliticians don't read the reports they're sent - thereshouldn't be any surprise," Bernard Squarcini told Le Figaro.
"The agencies know perfectly well that every country, evenwhen they cooperate on anti-terrorism, spies on its allies. TheAmericans spy on us on the commercial and industrial level likewe spy on them, because it's in the national interest to defendour businesses. No one is fooled."
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