German Chancellor Angela Merkel said this morning that allegations that a German man worked as a double agent for US intelligence were serious.
She said if they are true, they are a clear contradiction of what cooperation between partners is supposed to be about.
The case risks further straining ties with the US, which have been sorely tested by revelations last year of large-scale spying on Germany by the US National Security Agency.
"If the reports are correct it would be a serious case," Ms Merkel told a news conference in Beijing, standing next to Chinese Premier Li Keqiang.
"If the allegations are true, it would be for me a clear contradiction as to what I consider to be trusting cooperation between agencies and partners."
The White House and US State Department have so far declined to comment on the arrest of a 31-year-old employee of Germany's BND foreign intelligence agency.
According to intelligence and political sources, the man admits passing documents to a US contact.
Those include information about a parliamentary committee looking into allegations by former US intelligence contractor Edward Snowden that the US carried out major surveillance in Germany, including monitoring Ms Merkel's phone.
German Foreign Minister Frank-Walter Steinmeier, who was on a trip to Mongolia while Ms Merkel was in China, said the spying case would have consequences if the circumstances are confirmed.
"We haven't finished clearing this up yet. But if suspicions are confirmed that American secret services were involved, it will become a political issue and we can't just get back to business as usual," he told reporters in Ulan Bator.
Surveillance is a sensitive issue in a country where memories of the Nazi's Gestapo secret police and communist East Germany's Stasi ensure the right to privacy is treasured.
As Ms Merkel visited China, where she oversaw the signing of agreements involving Airbus Group NV's helicopter division selling 100 aircraft to Chinese companies, a German intelligence chief warned that some firms in China faced a growing threat from industrial espionage by Chinese government agencies with huge resources.
"Germany is against that - regardless of where it comes from," Ms Merkel said, in reference to industrial espionage.
"We have a duty as the state to protect our economy ... We are for the protection of intellectual property."
China's premier repeated his government's denial that it was involved in such activities.
"China and Germany, it can be said, are both victims of hacking attacks. The Chinese government resolutely opposes hacking attacks as well as the use of the internet to steal commercial secrets or intellectual property," Mr Li said.
"China will engage in dialogue and consultation to protect the security of the internet."