* World's biggest trading partners aim for deal by end of 2014
* Pact could boost US and EU GDP by more than $100 billion each a year
* Revelations about U.S. spying have soured ties
By Doug Palmer
WASHINGTON, July 8 (Reuters) - The United States and the European Union began talks on Monday on a landmark bilateral free trade agreement, despite European concerns about U.S. spying that had threatened to delay the start after nearly two years of preparation.
U.S. Trade Representative Michael Froman touted the economic benefits a deal would bring, not just for the United States and Europe but for the global trading system.
"We have the opportunity to complement one of the greatest alliances of all time with an equally compelling economic relationship," he said in remarks to the two delegations as the talks got under way in Washington.
"And we have the opportunity to work together to establish and enforce international norms and standards that will help inform and strengthen the multilateral, rules-based trading system."
President Barack Obama and European leaders announced a decision in February to pursue a trade pact, but revelations about U.S. government surveillance of phone and Internet records have since soured relations.
Charges that Washington was spying on the 28-nation EU have further strained relations, with France suggesting that the opening round of the talks be delayed for two weeks before softening its stance so they could could proceed.
U.S. internet companies, meanwhile, are concerned that EU privacy rules could increase their costs and make them less competitive by restricting the flow of data across borders.
"The reason why we decided to hold the talks now is that we are convinced that this deal is good for Europe," European Trade Commissioner Karel De Gucht told reporters in Geneva.
"We are convinced that this trade agreement will result in more jobs and more growth."
An EU official said that in parallel to the main talks on Monday, high-level U.S. and EU experts met, also in Washington, to address intelligence oversight, intelligence collection, privacy and data protection issues.
The proposed Transatlantic Trade and Investment Partnership pact would be the world's biggest free-trade deal, covering about 50 percent of global economic output, 30 percent of global trade and 20 percent of global foreign direct investment.
The Centre for Economic Policy Research in London has estimated that an ambitious agreement that eliminates tariffs and reduces regulatory barriers could boost U.S. and EU economic growth by more than $100 billion each a year.
The United States and the European Union are already each other's top trade and investment partners, with two-way trade that totaled more than $646 billion last year.
Business groups on both sides of the Atlantic support the proposed deal, but consumer, food-safety and environmental advocates expressed concern in a letter to Obama and European leaders on Monday that an agreement could weaken important government regulation.
ONE TANK OF GAS
This week's talks are expected to be mainly organizational, with negotiators split up into 15 different groups to deal with issues ranging from agricultural market access to electronic commerce to investment and competition policy.
One big EU interest is getting exemptions from U.S. "Buy American" requirements on public-works projects, while the United States wants the EU to reduce barriers to genetically modified crops that have frustrated U.S. farmers for years.
Former EU Trade Commissioner Leon Brittan called for a U.S.-EU free-trade agreement in 1995, but it took the rise of China, the death of world trade talks and the havoc of the global financial crisis to make the time finally right.
Even then, the two sides have tiptoed up to the talks. A high-level working group examined the issue for more than a year before releasing its recommendation in February for negotiations on a comprehensive trade and investment agreement.
U.S. officials, chastened by a decade of fruitless negotiations in the Doha round of world trade talks, said they wanted to be certain of reaching a deal, and reaching one quickly, before launching talks with the EU.
"If we're going to go down this road, we want to get it on one tank of gas," Froman said earlier this year.
For now, one tank of gas for both sides means reaching a deal before the current European Commission, the executive branch of the EU, finishes its term at the end of 2014.
But many trade experts believe the talks could stretch into 2015.
Since tariffs across the Atlantic are relatively low, much of the focus will be on reducing and preventing regulatory barriers to trade in areas ranging from agriculture and autos to chemicals and pharmaceuticals.
"There are sensitivities on both sides that will have to be addressed. But we think the prospect of a broad and comprehensive agreement gives us our best opportunity for achieving something that has eluded us before," Froman told Reuters in a recent interview.
U.S. firms such as Google Inc and Facebook Inc want Washington to tackle EU privacy and data protection rules that put them at a disadvantage in the EU market for cloud computing, social media, mobile apps and other internet services.
That goal might be harder to achieve after revelations that the U.S. National Security Agency uses customer data from many internet companies to identify potential threats.
"It's made a difficult negotiating issue even harder," although the gains from a potential overall agreement are so big that they still favor the two sides reaching a deal, said Jeffrey Schott, a senior fellow at the Peterson Institute for International Economics, a Washington think tank.
Last week, the EU threatened to suspend two agreements granting the United States access to European financial and travel data unless Washington showed it was respecting EU data privacy rules.
German Chancellor Angela Merkel, one of the biggest proponents of the trade deal, said on Saturday that Europe must make sure its concerns about U.S. surveillance are not swept under the carpet as the talks proceed.