* Schroeder-Putin friendship forged when defied Bush on Iraq
* Former chancellor defends Russia's actions in Crimea
* Critics see him as Putin lackey, others want him to mediate
BERLIN, March 27 (Reuters) - Former German chancellor Gerhard Schroeder has come under fire in Germany for defending his close friend Vladimir Putin and warning of the perils of isolating the Russian president over the crisis in Ukraine.
Schroeder, 69, has been excoriated for speaking out in favour of Moscow and against the German government position, not least because of his 250,000 euro salary as board chairman for a pipeline joint venture with Russian gas monopoly Gazprom.
"Schroeder is spreading the Kremlin's propaganda and everyone should understand that he's now a paid spokesman for Russia," said Manuel Sarrazin, who sits on the European affairs committee of the German parliament for the opposition Greens.
"He's in the service of Russia with a big conflict of interest," Sarrazin told Reuters.
But others say the former chancellor's friendship with the Kremlin leader could be good for Germany by keeping open an important channel of dialogue.
"I don't think their man-to-man friendship is hurting Germany at all," Philipp Missfelder, a foreign policy expert in parliament for Chancellor Angela Merkel's conservatives, told Reuters.
"I hope it'll help. It's better when people talk more rather than less with each other. I hope Schroeder can use his influence to help Germany."
Chancellor from 1998-2005, Schroeder has been Putin's best friend in the West since both were ostracised by U.S. President George W. Bush for opposing the 2003 Iraq invasion. He rejects any suggestion his business ties with Moscow affect his views.
NATO and the European Union have been insensitive to Russia's interests and exacerbated the crisis by making Ukraine choose between better relations with the West or with Russia, he said in an appearance at the newspaper Die Zeit.
"I believe in the face of the cultural divisions of Ukraine this 'either-or' was not the right formula," said Schroeder.
He has criticised moves to impose sanctions and eject Russia from the G8, and has even backed a Kremlin argument comparing the annexation of Ukraine's Crimea region to NATO's intervention in Serbia's Kosovo province in 1999 - which he himself helped lead as the German chancellor of the day.
"We sent our airplanes to Serbia and together with NATO dropped bombs on a sovereign state without having a U.N. Security Council resolution," Schroeder said. "So that's why I'm cautious about wagging my finger at anyone."
WHAT MAKES PUTIN TICK
Berlin's economic links with Moscow are much stronger than those of other big Western powers. Germany is the biggest buyer of Russian natural gas exports, and its government has tended to tread more carefully than the United States, Britain or France.
Most of Russian gas for Europe used to travel over Ukraine, which limited Moscow's ability to play hardball in negotiations with Kiev because threats to shut off Ukraine's gas would also hit European customers. Nord Stream, a new pipeline under the North Sea where Schroeder serves as board chairman, bypasses Ukraine and has helped strengthen Moscow's hand.
But Schroeder's ties with Putin go deeper than business. He says he understands the German-speaking Kremlin leader, who once came to his home in Hanover with a Russian choir to celebrate his birthday.
"I think I can imagine what makes him tick. I believe he's interested in consolidating Russia and its economy, and keeping it strong. He believes Russia should be treated on the same level as the United States. As someone with a sense of history, he has certain fears of an encirclement," he said at Die Zeit.
Schroeder rose from an impoverished childhood to become a transformational figure in his Social Democrat party, which returned to power last year as junior partners in a coalition government with Merkel's conservatives.
Like his British centre-left contemporary Tony Blair, he pulled his party to the centre, persuading labour unions to make concessions which his supporters say made Germany far more competitive and underpin its economic success today.
But, also like Blair, he gained a reputation for being a bit too comfortable in the company of the wealthy and powerful, an image which continued to dog him once out of office.
Less than three months after losing power to Merkel, he became advisory board chairman at Nord Stream. Opponents said the haste with which he took up the job was unseemly and the link to Russian interests too direct for a former chancellor.
Schroeder's supporters say the role is not a conflict of interest because it is an advisory position, not an executive job, and that it is common for retired German politicians to accept such posts in industry.
Carsten Koschmieder, political scientist at Berlin's Free University, said Schroeder is seen an apologist for Putin by those who want tougher sanctions but as a potential peacemaker by others who are eager to see a de-escalation of the crisis.
"For those who believe it's important to keep a dialogue open with Putin, Schroeder's doing the right thing - but not if you believe tougher sanctions are needed," he said, adding that the former chancellor "has never been especially bothered about what people think of him".
Schroeder is hardly alone with his criticism of the West. Two other former chancellors, Helmut Schmidt and Helmut Kohl, have also questioned the treatment of Putin and Russia.
Schmidt, a Social Democrat like Schroeder, has called sanctions against Russia "dumb", saying in the latest edition of Die Zeit: "It would be better, in the interest of peace, to sit down and talk instead of threatening sanctions."
Kohl, a Christian Democrat (CDU) like Merkel, told Bild newspaper in mid-March: "The upheaval in Ukraine was not handled intelligently. There's also been a lack of sensitivity with our Russian neighbours, especially with President Putin."
But those two elder statesmen have not faced the same criticism as Schroeder, presumably because they do not have his business ties to Gazprom and personal rapport with Putin.
An ARD TV investigation, called "The dubious activities of the ex-chancellor on Putin's behalf", said Schroeder took part in a secret meeting at the Russian embassy in Berlin on March 4, three days after Putin announced his right to invade Ukraine.
Schroeder's office declined to comment on the report and said he was not available for an interview.
Asked in 2004 if he thought Putin was a "flawless democrat", Schroeder replied: "I am convinced he is."
In his new book, "Klare Woerter" (Straight Talk), Schroeder speaks about his personal relationship with the Russian leader, who worked as a KGB spy in East Germany in the 1980s.
"Putin lived here for a long time and has a very close relationship to Germany," Schroeder wrote. "That made it easier to work with him than with other leaders."
Putin's good German skills mean the two "speak openly and even controversially with (each other) because it was always clear that no one else would ever know what we talked about."
Schroeder said Putin sings German Christmas carols with his daughters, is religious and has a self-deprecating sense of humour. "The most important thing for a friendship is a common language," said Schroeder, who has two adopted children from Russia, Viktoria and Gregor. "It makes everything easier." (Reporting by Erik Kirschbaum; Editing by Stephen Brown and Peter Graff)