"We will not allow ourselves to be treated by the Americans in this manner. Spying on friends and partners is completely unacceptable," German Interior Minister Hans-Peter Friedrich said yesterday.
Germany expected an apology from the US and an assurance that its surveillance operations will be stopped immediately, he said in a TV interview.
Weekly German news magazine Der Spiegel said top secret NSA documents disclosed by former NSA contractor Edward Snowden showed that the agency conducted a spying programme on Merkel's mobile phone and possibly the entire government complex in Berlin from the nearby American embassy from as far back as 2002.
Decades of close friendship and partnership built up on the basis of mutual trust have suffered "severe damage" and it will take a lot of efforts to restore it, Friedrich said .
He also warned that if American intelligence services tapped mobile phones in Germany, they have violated the country's laws and those responsible could face charges of criminal offence.
Foreign Minister Guido Westerwelle said the NSA's surveillance operations are politically "very damaging".
Meanwhile, a report by Bild am Sonntag newspaper said Obama was informed about the NSA's tapping of Merkel's mobile phone already in 2010 by its director.
Justice Minister Leutheusser Schnarrenberger said if the allegations were proved true, it is a "very serious matter" and there can be no "business as usual" with the Americans.
She joined the opposition to demand a parliamentary inquiry committee to investigate the snooping scandal. The Federal Prosecutor's Office is currently examining whether to take up investigations into the allegations, she said.
Social Democratic Party's Thomas Oppermann said the alleged tapping of Merkel's phone is a "severe breach of trust" in German-American relations and that can be restored "only when whole facts are revealed".
"We have always given the Americans correct information, but we have received from them false information and we were misled by them," Oppermann said.
He called for an parliamentary inquiry committee which will invite Snowden to appear as a witness. "Snowden has given us credible information while the Americans apparently lied to us," he said.
Green party's new co-chairman Anton Hofreiter said his party will press for inviting Snowden as he can "provide us first hand information instead of depending on information from unwilling Americans and incapable German intelligence services".
Chancellor Merkel's Christian Democratic Union and its Bavarian sister party Christian Social Union have so far rejected proposals to set up a parliamentary inquiry committee, saying the parliamentary control committee on intelligence services is the most suitable forum to investigate the allegations.