* U.S. says German export dependence hurts global economy
* Germany rejects criticism as euro zone imbalances shrinking
Angela Merkel's conservatives on Thursday rejected U.S. criticism of Germany's dependence on exports but her likely future coalition partner agreed Europe's bulwark economy must do more to spur domestic demand.
The United States has long called for countries like China and Germany with trade surpluses to do more to spur imports but the Obama administration's reprimand in a semi-annual report to Congress on Wednesday stood out for its stark language.
It said Germany was hampering economic stability in Europe and hurting the global economy. The German current account surplus is the biggest in the world.
Both Merkel's conservatives and the centre-left Social Democrats, who are in talks to form a coalition government after a September election, retorted that Germany would continue to strive to be competitive globally.
"We have always been a strong export country and we are proud of that," said Ilse Aigner, the conservatives' lead negotiator in coalition talks for economic issues.
Her SPD counterpart Hubertus Heil said, however, that Germany must become aware of its "duty" to strengthen domestic demand, which meant championing salary rises and stimulating investment.
Germany shed the label of "sick man of Europe" after reunification in 1990 partly through years of wage restraint that made it more competitive.
But now its economy is outpacing peers and it is under pressure to do more to help the euro zone out of its crisis by stimulating domestic demand and as a result, taking more imports from the rest of the currency bloc, its main trading partner.
"Growth in Europe remains weak," said U.S. Treasury Secretary Jack Lew at an investment summit on Thursday.
"It is critical that surplus countries contribute more to demand as deficit countries undergo adjustment."
Germany has exported more than it imports since 1952, running up a trade deficit only in the early years of economic devastation after World War Two. Its trade surplus is largest vis-a-vis France, the United States and Britain.
David Lipton, first deputy managing director of the International Monetary Fund, said it would be useful for European partners and the global economy for Germany to bring its current account surplus down to a lower level.
"In a world where there is a need for deficit countries to bring their deficits under control, that just simply can't happen unless surplus countries allow or help their surpluses come somewhat under control as well," he said at in Berlin.
The U.S. criticism comes at a tricky juncture in relations. German envoys met the White House national security adviser in Washington on Wednesday after reports the United States monitored Merkel's cellphone.
Germany argues it has more than halved its current account surplus with the euro zone as a share of gross domestic product since 2007. Trade is expected to subtract from rather than contribute to economic growth in 2013, while domestic demand, albeit still weak, will drive expansion.
"Within the euro zone, the German trade surplus has come down rapidly from a pre-Lehman peak of close to 5 percent of German GDP to 2 percent now," said Holger Schmieding at Berenberg Bank. "That is a significant adjustment."
He argues the rise in the trade surplus with the rest of the world, including the United States, was due purely to competitiveness. Put differently, Germany's surplus has come largely because it is producing the sort of goods fast-growing economies like China and India need at the right time.
"And as the rapid turnaround at the euro periphery from big current account deficits in 2008 to surpluses now shows, the euro periphery is also becoming fairly competitive," he added.
But Berlin's critics say its overall current account surplus last year was 6.9 percent of GDP - higher even than the 6 percent threshold the European Commission considers excessive.
They say Germany is still saving too much and needs to liberalise its service sector to boost domestic demand.
The SPD does agree with many economists that Germany can still do more, which may be reflected in the coalition deal, expected at the end of the year. In its election campaign, the SPD called for a hike in public investment, which has decreased as a share of GDP over the last decade, and for a minimum wage.