The US ambassador to Germany has been summoned by the foreign ministry in Berlin over claims that the NSA spied on Chancellor Angela Merkel tapping her phone.
Foreign minister Guido Westerwelle is to "spell out the position of the German government," over the allegations during a private meeting with US envoy John Emerson, the ministry said.
The quarrel is threatening to affect diplomatic relations between the two allies.
German defence minister Thomas de Maiziere said it would be "really bad" if the report was proved to be true.
"We can't simply return to business as usual," De Maiziere told ARD television.
The development comes a day after President Barack Obama tried to reassure Merkel she was not being monitored in a phone call between the two heads of state.
"The president told the chancellor: the United States is not monitoring and will not monitor the communications of the Chancellor," White House spokesman Jay Carney said.
He did not say whether Merkel had been spied on in the past.
The German government was reportedly made aware of the NSA's call monitoring of Merkel by Der Spiegel magazine, which previously published documents leaked by fugitive whistleblower Edward Snowden.
A spokesman for Merkel said the chancellor "views such practices... as completely unacceptable."
"Among close friends and partners, as the Federal Republic of Germany and the US have been for decades, there should be no such monitoring of the communications of a head of government," the spokesman said.
The diplomatic row risks overshadowing talks at an EU summit on economic recovery and immigration.
French president Francois Hollande has been calling for the US snooping issue to be discussed at the meeting after it was revealed the NSA monitored phone calls of millions of French phone records in a single month between December 2012 and January 2013.