* German Foreign Minister summons U.S. ambassador
* Phone scandal could hit free trade zone talks
* White House says is not tapping Merkel's phone
By Madeline Chambers and Alexandra Hudson
BERLIN, Oct 24 (Reuters) - Germany summoned the U.S. ambassador on Thursday over suspicions Washington may have bugged Chancellor Angela Merkel's phone and a leading German politician said a free trade deal would be hard to agree if the U.S. was infringing privacy.
Foreign Minister Guido Westerwelle's personal summons to the ambassador, a day after Merkel called U.S. President Barack Obama to demand clarification, showed how seriously Berlin was taking the issue, which has caused outrage in Germany.
The ambassador would be informed of the German government's position "in no uncertain terms", the foreign ministry tweeted.
State surveillance is a highly sensitive subject in a country haunted by memories of eavesdropping by the Stasi secret police in East Germany where Merkel grew up.
Social Democrat Chairman Sigmar Gabriel, whose party is in coalition talks with Merkel's conservatives, said he was shocked by the idea the U.S. had spied on Merkel and other Germans.
"It is hard for me to imagine negotiating a free trade deal with the United States to the end if the freedoms and personal rights of citizens in Europe are endangered," said Gabriel, who could be vice chancellor under Merkel.
His anger was echoed by many other Germans, who feel such eavesdropping would mark a betrayal by the country that did most to defend West Germany from Communism during the Cold War.
"The Americans are and remain our best friends but this is a no go," Defence Minister Thomas de Maiziere told German television. He said he had long thought his mobile phone was being tapped, "but not by the Americans".
The White House said Obama had assured Merkel Washington "is not monitoring and will not monitor" her communications, but stopped short of denying it had previously monitored the chancellor, who is often seen with a mobile phone in her hand.
Merkel's spokesman said Berlin had received information her phone may have been monitored and Merkel had made clear that if true, it would represent a "grave breach of trust".
Germans on the street were also angry.
"This is not how you should treat your partners," said Stephanie Hilebrand, 38, walking by the Brandenburg Gate during a visit from the western town of Paderborn.
"We're not terrorists, nor is our chancellor."
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," Germany's Elmar Brok, a conservative member of the European Parliament, told Reuters.
The two got off to a bad start in 2008 when Merkel stopped Obama, then a Democrat senator from Illinois, holding 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 the euro zone's crisis management.
The question of mass U.S. spying on European allies caused a storm in Germany over the summer after revelations from Edward Snowden, the fugitive former U.S. intelligence operative. Merkel's government had tried to draw a line under it.
On a June visit to Berlin after revelations of the covert U.S. Internet surveillance programme code-named Prism, Obama defended U.S. anti-terrorism tactics, saying Washington was not spying on ordinary citizens.
The new revelations look likely to overshadow a summit of EU leaders in Brussels which starts on Thursday, with France pushing for them to be put on the summit's agenda after a report the U.S. had collected French phone records.
"It is important for the EU to appear united on this against the United States," said Wolfgang Bosbach, a member of Merkel's conservative Christian Democrats (CDU).
However, some lawmakers said it was in Germany's interests to get the free trade deal though. "I don't think we would improve things if we suspended them. It is important to continue the talks swiftly, and that we reach agreements," Bosbach said.
Industry groups also urged Berlin 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.