The Independent report said Britain's electronic eavesdropping centre GCHQ (Government Communications Headquarters) appeared to be using high-tech equipment on the embassy roof to intercept German data.
The broadsheet cited aerial photographs and information about past spying activities in Germany, as well as documents provided by Edward Snowden, the former contractor with the US National Security Agency (NSA) who has fled to Moscow.
The report comes hot on the heels of a furore over claims that the United States tapped Merkel's mobile phone as part of worldwide surveillance operations.
The daily said Snowden's documents suggested GCHQ has worked with US agencies and other partners to operate a network of electronic spying posts from embassies around the world, intercepting data in host nations.
A spokeswoman for British Prime Minister David Cameron's office said: "We don't comment on intelligence matters."
The Independent printed photos showing an aerial view of the British and US embassies -- which are on the same block next to the Brandenburg Gate in central Berlin -- highlighting large white boxes that it said were the intercept "nests".
ARD broadcast the images on October 27, saying that the top floor of the embassy possibly houses a listening 'nest'.
Washington's ties with key allies have been strained in recent weeks by leaks appearing to show that the US has eavesdropped on dozens of foreign leaders, as well as tapping tens of millions of European phone calls and data from Internet giants such as Google and Yahoo.
The Guardian said the European intelligence services, in a "loose but growing" alliance, carried out surveillance by directly tapping fibre-optic cables and through secret relationships with communications companies.
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