By Madeline Chambers
BERLIN, July 10 (Reuters) - Germany told the CIA station chief in Berlin to leave the country on Thursday in a dramatic display of anger from Chancellor Angela Merkel at the behavior of a close ally after officials unearthed two suspected U.S. spies.
The scandal has chilled relations with Washington to levels not seen since Merkel's predecessor opposed the U.S. invasion of Iraq in 2003. It follows allegations that Merkel herself, who grew up in Stasi-ridden East Germany, was among thousands of Germans whose mobile phones have been bugged by American agents.
"Spying on allies ... is a waste of energy," the chancellor said in her most pointed public remarks yet on the issue. "We have so many problems, we should focus on the important things."
Senior conservative supporters denounced U.S. "stupidity" and some Americans said spying on their friends had backfired.
"In the Cold War maybe there was general mistrust. Today we are living in the 21st century. Today there are completely new threats," Merkel said in Berlin, once a key CIA listening post behind the Iron Curtain during the superpower duel with Moscow and now the reunited capital of Europe's most powerful economy.
Her spokesman said the request for the top U.S. intelligence official in the Berlin embassy to leave was made in response to questions raised in recent months on U.S. intelligence activity in Germany and prosecutors' investigations.
A U.S. government source said the official - whom neither side named - was Berlin station chief for the CIA, the Central Intelligence Agency. A German source said the man would face possible forcible expulsion if he did not leave voluntarily.
Washington's embassy and Merkel's office sit a few hundred meters apart. They lie east and west of what was the Berlin Wall, for the removal of which many Germans still give great credit to their U.S. ally - deepening today's sense of betrayal.
On Wednesday, Berlin said it had discovered a suspected U.S. spy in the Defense Ministry. That came just days after a German foreign intelligence worker was arrested on suspicion of being a CIA informant and admitted passing documents to a U.S. contact.
The scale of public outrage at these revelations has put pressure on Merkel to take action against the United States, an ally whose defense of West Germany in the Cold War long assured Americans a warmer welcome there than elsewhere in Europe.
However, there is a limit to what she can do and both sides stressed the need to continue to work closely together. They have done increasingly in recent years, on issues from Iran to Ukraine, as Germany shakes off its postwar reticence in foreign affairs and takes on a role more suited to its economic weight.
Experts said that talks on a free trade deal between the European Union and United States, called the Transatlantic Trade and Investment Partnership (TTIP), may be affected; Berlin may push harder on some aspects of the deal in areas such as data protection - long a major concern for Germans after the abuses of the Nazi Gestapo and East German Stasi secret police.
"But the idea that Merkel would somehow try to torpedo TTIP is not really likely," said Germany expert Hans Kundnani at European Council on Foreign Relations in London.
John Kornblum, a former U.S. ambassador to Germany who still lives in Berlin, said: "I believe the Germans are telling the Americans, 'We want to continue close cooperation but you've pushed us too far and have forced us to react'."
Merkel's government poured scorn on the alleged espionage.
Interior Minister Thomas de Maiziere said the information the United States appeared to have obtained was "laughable", contrasting that with the "disproportionate and serious political damage" the scandal had caused.
Merkel was "not amused", Finance Minister Wolfgang Schaeuble said, adding: "This is so stupid, it can only make you weep."
Tensions have risen since revelations last year stemming from documents leaked by Edward Snowden, a contractor with the U.S. National Security Agency (NSA). Those caused Berlin to demand a mutual "no-spy deal" which Washington has resisted.
"Ever since the NSA disclosures broke last year, the issue of U.S. spying has been an extremely sensitive issue in Germany," said Karen Donfried, president of the German Marshall Fund of the United States, which promotes U.S.-European ties.
Some Americans asked whether the espionage activities were worth the bother: "I am not troubled that the United States conducts espionage, even against friendly states," said one former senior U.S. intelligence official.
"I am troubled when we attempt espionage and do not do it well. We learn nothing and we embarrass a friend and ourselves." (Additional reporting by Stephen Brown, Michelle Martin, Alexandra Hudson, Annika Breidthardt and Andreas Rinke in Berlin and Mark Hosenball and Jeff Mason in Washington; Editing by Stephen Brown and Alastair Macdonald)