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President of the German Federal Intelligence Agency (BND) Gerhard Schindler stands at the former monitoring base of the National Security Agency (NSA) in Bad Aibling, south of Munich, June 6, 2014. REUTERS/Michaela Rehle/File Photo

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By Noah Barkin , Thorsten Severin and Sabine Siebold

BERLIN (Reuters) - Angela Merkel's government refused on Wednesday to explain the sudden removal of Germany's spy chief, a surprise move which catapulted the BND intelligence service back into the headlines after a series of scandals that embarrassed the chancellor.

The exit of Gerhard Schindler comes at a time when Germany, like other European countries, is trying to cope with a surging threat from Islamic State militants who launched large-scale attacks in Paris and Brussels in recent months.

Schindler, 63, has led the BND since 2012 and had been expected to continue for another two years overseeing an overhaul in the agency and its move into a gleaming new headquarters in central Berlin.

His position had been seen as safe after he weathered intense pressure a year ago, when it was revealed that the BND had helped the U.S. National Security Agency (NSA) spy on European allies.

Those revelations sparked public outrage in a country suspicious of surveillance because of the excesses of Nazi and Communist secret police in its past. A parliamentary investigation was launched along with a legislative push to reform the BND. Schindler accepted that BND field offices needed to be reined in and welcomed the reform drive, arguing that the agency's mission should be spelled out more clearly.

But news leaked out late on Tuesday that he was to be relieved of his duties from July 1 and replaced by Bruno Kahl, a little known official in the finance ministry who is a close ally of influential Finance Minister Wolfgang Schaeuble.

Merkel's spokesman Steffen Seibert repeatedly rebuffed questions about why Schindler was being replaced.

"I have nothing to say about the reasons behind this decision," Seibert told a news conference.

Even senior lawmakers in the ruling parties complained that they were caught off guard by the news.

In a news release on Wednesday morning, Merkel's chief of staff Peter Altmaier thanked Schindler for his work and stressed that the BND faced "major challenges" in the coming years, including adapting its mission to new security threats and overhauling its technology and personnel.

His underlying message seemed to be that the government preferred someone at the top of the agency who could see these changes through from start to finish. Kahl is 10 years younger than Schindler.

But senior officials, speaking on condition of anonymity, also suggested that Schindler, who was known for speaking openly and frankly, lacked the political sensitivity that Merkel and her top ministers value.

One said Merkel was keen to keep the issue of BND reform, which plays to the strengths of rival parties on the left, out of the 2017 election campaign and preferred to have someone at the top of the agency who could be counted on to cooperate.

"There are more questions than answers at the moment about this change," Burkard Lischka, a lawmaker and spokesman on domestic security issues for the centre-left Social Democrats (SPD), who rule in coalition with Merkel's conservatives.

Stephan Mayer, who holds the same post for the conservatives in the Bundestag lower house, said: "I simply can't understand this decision". He described Schindler as a "very good BND president".

POLITICAL CONSIDERATIONS

Some lawmakers speculated that health issues might have been behind his exit. Schindler missed several weeks recently with tinnitus, or ringing in the ears. One pointed to recent revelations that Schindler's sister is married to a spokesman for the anti-immigration Alternative for Germany (AfD) party.

But most of the dozen or so officials Reuters spoke to dismissed these as irrelevant factors, pointing instead to political considerations and an accumulation of BND problems, starting with the NSA revelations last year.

In early December, the BND incurred the wrath of the government by publishing a brief report in which it accused Saudi Arabia of a shift to "impulsive" policies under young Deputy Crown Prince Mohammad bin Salman.

A year before, a BND employee was arrested for passing on secrets to the CIA and the Russians.

Guido Steinberg, an expert at the German Institute for Security and International Studies in Berlin, said that at the root of the problem was a "naive" view among German politicians about the role of a spy agency.

"At a time when developments in the Middle East can have a big impact domestically, Germany cannot afford a weak BND. But I don't expect this to change," he said.

(writing by Noah Barkin; editing by Peter Graff)

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