* Arms sales from world's no. 3 exporter soar to non-allied states
* German small arms exports hit record levels in 2013
* Economy minister toughens controls as public backlash grows
* Maker of famed G36 assault rifle could be hard hit
By Alexandra Hudson and Sabine Siebold
BERLIN, July 23 (Reuters) - For lawmaker Jan van Aken, little symbolizes more potently all that he finds indefensible about Germany's arms exports than the German and French-made anti-tank missile that he was shown in northern Syria.
From its serial number, he believes the 1970s MILAN rocket was sold legitimately by France to then Syrian leader Hafez al-Assad. After decades in a depot, it fell into the hands of al Qaeda-linked militants in the uprising against Assad's son Bashar.
Earlier this year, the German politician examined the waist-high green tube left after the missile was fired at the Kurds.
Van Aken fears the arms that Germany exports today may one day share the same fate. Arms exports rose 24 percent to 5.85 billion euros in 2013 from 2012 and are increasingly heading to states in volatile ares, such as Saudi Arabia, Qatar and Algeria.
These exports have started to stir public distaste. Economy Minister Sigmar Gabriel pledged last month to restrict them, even if that means sacrificing some of the estimated 80,000 German jobs in arms manufacturing.
"It's a disgrace that Germany is among the world's largest weapons exporters," Gabriel has said.
The debate within Germany mirrors a broader international debate over arms exports that has gained urgency since the downing of a Malaysian passenger aircraft over eastern Ukraine last week. Washington believes the aircraft was brought down by a surface-to-air missile fired from territory held by pro-Russian separatists.
In March Germany suspended the transfer of 5 million euros worth of defence equipment to Russia because of Moscow's annexation of Ukraine's Crimea region. It also stopped the delivery of a combat simultation kit made by Rheinmetall , worth about 100 million euros.
Germany's freezing of defence contracts contrasts with France, which for now is pressing ahead with a 1.2 billion euro ($1.6 billion) contract to supply Russia with its Mistral warship.
Weapons makers say Germany risks losing jobs and technical know-how and buyers will simply buy elsewhere, leaving the world no safer. They want to know what Gabriel's "more restrictive" export policy means in practice.
It is an industry, however, with few public friends and supporters, even among the wider business lobby.
"Our total exports are 1,100 billion euros and weapons exports make up only a very small proportion," said Anton Boerner, head of the German exporters' association (BGA). "If people stopped buying German cars then we would be worried, but the issue of arms exports doesn't concern us."
Since Angela Merkel took office in 2005, Germany has overtaken France to become the world's third largest arms exporter behind the United States and Russia. This is a surprising rise for a country that has traditionally taken a back-seat on global security affairs and where a pacifist ethos is ingrained in many after the horrors of Nazism.
Almost two thirds of Germans oppose arms exports, according to a 2012 poll. Yet just as the cars that Germany produces are coveted the world over for their quality engineering and reliability, so too are German tanks and guns.
Buyers outside of traditional NATO partners have lined up to make purchases, and Germany has increasingly said yes to deals that helped offset dwindling orders from allies.
In early 2013, Berlin raised eyebrows by authorising Krauss-Maffei Wegmann's (KMW) 2 billion euro order from Qatar - 62 tanks for a country of 2 million people which is criticised in the region for backing Islamist rebels in Syria and elsewhere.
Interest from abroad comes at a time when Germany's own military has scaled back, reducing its arsenal of 4,600 tanks from the Cold War era to just 225 today.
The SIPRI security think-tank in Stockholm says selling arms to 'partner' countries in the Middle East or North Africa has been part of Germany's response to the Islamist terror threat since 2001. Control over the delivery of spare parts also allows Berlin to wield some soft influence later.
Gabriel, whose Social Democrats (SPD) share power with Merkel's conservatives, blames the surge in sales on Merkel's previous coalition with the Free Democrats (FDP).
While 38 percent of arms went to EU and NATO countries or other close allies such as Australia in 2013, 62 percent went to other states - up from 55 percent in 2012.
Furthermore, total exports of small arms and light weapons (SALW) - portable arms such as guns, grenade launchers and anti-aircraft guns blamed for 60-90 percent of deaths in the world's conflicts - hit a record 135.1 million euros, a rise of 43 percent, with 40.5 million worth heading to Gulf states.
"There are no countries to which you can safely export weapons, particularly small arms and light weapons," said van Aken. "You can never be sure into whose hands they will fall, even if you are selling to friends."
Van Aken's Left party, which polled 9 percent in 2013's federal election, is an outlier on foreign policy, wanting NATO disbanded and Germany to give up its armed forces. However, its opposition to arms exports has found wider public resonance.
As arms are often only produced to order, applications are made years in advance. The most contentious must secure approval from Germany's nine-member security council, consisting of the chancellor, her chief of staff and the foreign, defence, finance, economy, development, interior and justice ministers.
The council meets in secret and the government says decisions are taken on a case-by-case basis.
Arms industry insiders say Gabriel's economy ministry, which considers straightforward cases and passes on more complex ones to the security council, is sitting on around 2,000 applications as it begins its new approach. A spokesman declined to comment.
Exports of components such as sights or target locks for weapons systems assembled abroad must undergo the same stringent checks if they are to be sold on to non-NATO or non-EU states.
Airbus is waiting for news on its application to export target-locking devices for armoured patrol vehicles to Belgium. From Belgium they are due to go to Canada, where they will be built into vehicles for U.S. firm General Dynamics and then sent to Saudi Arabia. Germany's approval process takes account of the final destination.
An Airbus executive, speaking on condition of anonymity, said the problem is not that applications are being refused, but that hardly any decisions are being taken at all. The ministry declined to comment.
Georg Wilhelm Adamowitsch, head of Germany's Security and Defence Industry association, complained that Berlin had no idea of the consequences its new approach would have on foreign manufacturers that use German parts. The government should at least make sure there is a common Europe-wide stance, he said.
A German arms industry executive, speaking on condition of anonymity, said European customers kept waiting for German components would eventually take their business elsewhere.
Gabriel has advised German arms manufacturers to focus on civilian products instead. That may be difficult for firms like Heckler & Koch, which makes the G36 assault rifle and employs 700 people in the small southern town of Oberndorf.
Developed for the German army, the G36 is standard issue for infantry and special forces worldwide and used in 30 countries.
Heckler & Koch guns have appeared in Libya and Mexico, in circumstances clearly beyond legal German export channels.
In 2008 Germany allowed Saudi Arabia a licence to produce Heckler & Koch's G36, although it would still depend on some parts from Oberndorf. German magazine Der Spiegel has reported that Gabriel will now forbid the export of these parts.
A source at Heckler & Koch said they were waiting to hear. Gabriel's ministry has said they never comment on individual arms export applications.
Some of Merkel's conservative lawmakers accuse Gabriel of jumping on a populist cause to boost his profile with voters and nurture his ambitions of becoming chancellor in 2017.
"Defence projects are already being planned without German components," said Joachim Pfeiffer from Merkel's Christian Democrats (CDU), lamenting the damage to German industry.
Earlier this month Krauss-Maffei Wegmann said it had entered merger talks with French tankmaker Nexter as both seek ways to cope with military budget cuts. Arms industry insiders say the move was accelerated by Gabriel's intention to curb exports.
Rheinmetall has just hired Merkel's former development minister Dirk Niebel, from the FDP, as chief lobbyist. The move to the arms industry by someone who used to sit on the national security council has enraged anti-lobby groups.
Van Aken believes that, as few details are ever released by the council about which exports it has refused and why, Gabriel will be under pressure to make a grand gesture to prove he has been effective - for example by banning the export of SALWs.
He takes heart from the way the production and export of land mines was all but stopped in 1999 as outrage grew.
"Imagine a country like Germany banning small weapons exports - and how it would stigmatize those that still do export," he said. "Germany has the chance to set an example." (Writing by Alexandra Hudson; Edited by Stephen Brown and Janet McBride)