On Monday, Telekom head Rene Obermann confirmed a weekend report by German newsmagazine Der Spiegel that Europe's largest telecommunications company had monitored hundreds of thousands of phone calls to find where employees leaked information to the media. The company had hired private investigators to track calls between supervisory board members and journalists, Telekom said.

The news prompted a significant outcry in Germany, a country sensitive to privacy rights after they were breached during the country's Nazi and communist times.

The internal tracking at Telekom began after a series of layoffs in 2005 and 2006 had been leaked to the media; at the time, the company, struggling with the effects of having lost its monopoly, set out on a cost-slashing course.

"The executive managers possibly spying on their own surveillant, the supervisory board -- that's indeed unprecedented," Manuel Theisen, a business professor at the Ludwig Maximilians University in Munich, told German news channel n-tv.

In Germany, the case may be unprecedented, but it resembles a scandal at U.S. firm Hewlett-Packard, which also spied on board members and journalists to expose leakages of company information.

The case is especially sensitive for Germans because Telekom, despite having its monopoly slashed a few years ago, still dominates the country's land line market and has significant access to a vast amount of telecommunications data. On top of that comes the German government's responsibility to keep Telekom clean: Berlin holds roughly 32 percent in the company, and of course it demanded a thorough investigation.

Obermann, who took over at Telekom in late 2006, at a time when the spying reportedly had ceased, vowed that managers who had violated the law face "severe consequences."

One of Germany's most respected managers, Obermann last month forwarded an internal inquiry over the accusations to the prosecutors, after a fax from a Berlin-based security consulting agency requesting remaining bills to be paid, Der Spiegel said in its latest issue. According to the fax, Kai-Uwe Ricke, then the CEO of Telekom, signed off on the "unusually comprehensive" spying activities, as the security company called them.

The German Finance Ministry said it was confident that Obermann would do everything necessary to clarify the matter, but officials are nevertheless questioning corporate governance and political ethics after a series of privacy data breaches that have occurred over the past years.

Germany's Federal Intelligence Service, or BND, came under fire for repeatedly spying on journalists, and only the government of Chancellor Angela Merkel ordered the practice to be stopped. Berlin nevertheless used the BND's services to get to a CD containing stolen bank information on hundreds of rich Germans who had evaded taxes by moving their money to bank accounts in Liechtenstein.

The BND, which acted as an intermediary, organized the purchase of the CD for the Finance Ministry, which was willing to pay some $6 million for it.

Data protection officials see the Telekom scandal as yet another sign of Germany's development into a Big Brother state. The German government in the past two years has tried repeatedly to boost authorities' security and anti-terror options; in several cases Berlin failed to push them through because of data protection and privacy rights concerns.

The Interior Ministry recently scored a victory when it got an extensive anti-terror bill past the Cabinet. It would allow police not only to wiretap suspects' apartments, but also to install mini-cameras that secretly videotape what happens inside an apartment. The new provision also would legalize the surveillance of an innocent person's home if suspects visit there. Add to that the possibility of installing spy software on a suspect's personal computer, and you have the key elements of the legislation that has most data protection officials in Germany fuming.

The bill will be decided upon between July and September, observers say, adding that the Telekom scandal may have raised the bar for it to be passed.

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