She made the comments following a meeting of the European Commission in Brussels.
Merkel said EU member states had agreed on the importance of co-operation between US and European intelligence services in ensuring the safety of citizens. However she added that "rather than making co-operation easier, mistrust makes it more difficult."
She also announced that Germany and France intended to redefine their security co-operation with the US by the end of this year.
However the chancellor deflected questions about her telephone conversation with US President Barack Obama, by stressing: "The American president is always well prepared and we are united by a now long-standing relationship, which includes occasional differences of opinion."
Merkel's comments follow the revelation on Friday that the tapping of her phone may have been directed a few hundred metres away from the seat of the German government at the US embassy in Berlin.
The Süddeutsche Zeitung claimed Merkel’s phone tapping was possibly being conducted from a listening station which was part of the Special Collection Service (SCS) – an eavesdropping programme run by the CIA and NSA at the US embassy on Pariser Platz.
The embassy is around 500 metres from the German parliament and government buildings including her office, the Kanzleramt.
It said the suspicions arose from documents provided by whistleblower Edward Snowden, a former NSA contractor – who leaked documents exposing a mass surveillance programme by the NSA.
When asked by The Local, the embassy declined to comment.
On Friday Germany and France called on Washington to agree on rules in the spy game after revelations the US tapped German Chancellor Angela Merkel's mobile phone.
The call was made at a European Union summit in Brussels where leaders were supposed to be discussing economics and immigration until it emerged on Wednesday night that the US National Security Agency (NSA) had likely spied on Merkel's phone.
Leaders "took note of the intention of France and Germany to seek bilateral talks with the US", EU President Herman Van Rompuy told a press conference after a first day of summit talks wrapped up.
Van Rompuy said other countries could join Berlin and Paris should they wish in seeking this trust-based "understanding" with the United States "before the end of the year" in the field of intelligence gathering.
In a statement in the early hours of Friday morning, the leaders of the 28-state EU "underlined the close relationship between Europe and the USA and the value of
They "expressed their conviction that the partnership must be based on respect and trust, including as concerns the work and cooperation of secret services."
Merkel had arrived at the two-day talks saying: "Spying between friends, that's just not done" after reports the US National Security Agency had eavesdropped her calls.
"We need trust between partners and such trust needs to be re-established," she said.
The story is unlikely to go away any time soon, with Britain's Guardian saying Washington had listened in on the phone conversations of 35 world leaders.
Meanwhile, an advisor to President Obama acknowledged that US surveillance
had created "significant" challenges with its allies.
"Though we collect the same sort of intelligence as all nations, our intelligence community has more restrictions and oversight than in any other country in history," Lisa Monaco, assistant to the president on homeland security and counterterrorism, wrote in an opinion article in American newspaper USA Today.
Recent disclosures "have created significant challenges in our relationships with some of our closest foreign partners," Monaco said.
Monaco added that "the president has directed us to review our surveillance capabilities, including with respect to our foreign partners."
In Washington earlier, White House spokesman Jay Carney told reporters: "We are not going to comment publicly on every specified alleged intelligence activity," noting that all nations spy on each other.
Hollande and Merkel called Obama earlier this week demanding clarification of claims the NSA had spied on millions of French phone calls and on the German leader personally.
The French president said there had to be a code of conduct put in place, recalling that the EU had set up a special unit to review the issue after leaks by fugitive former US intelligence contractor Edward Snowden earlier this year.
These experts have to "accelerate their work with our American allies", Hollande said, because "this is a subject which is not going away."
"We need to get results," he said, adding that in the end, Snowden's revelations may prove useful.
White House spokesman Jay Carney refused to say whether Washington was at fault.
"We are not going to comment publicly on every specified alleged intelligence activity," Carney said, noting too that all nations spy on each other.
Friday's summit is supposed to tackle an immigration crisis highlighted by the deaths of hundreds of desperate refugees trying to reach Europe's shores but the spying scandal could easily take the headlines again as more revelations come through.
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