* Merkel says group poses threat to Germany and Europe
* Chancellor points to threat of returning jihadists
* Berlin sending assault rifles, RPGs, anti-tank systems to Kurds
* Delivering arms to conflict zone breaks post-war taboo (Adds quotes, background, analyst)
By Noah Barkin
BERLIN, Sept 1 (Reuters) - German Chancellor Angela Merkel defended her government's taboo-breaking decision to send arms to Kurds fighting Islamic State militants in Iraq, telling parliament on Monday that the group posed a major security threat to Germany and Europe.
A day after Berlin announced it would send anti-tank rockets, assault rifles and hand grenades to the Kurds, Merkel said Germany had a responsibility to intervene in the conflict to prevent a humanitarian catastrophe in Iraq, citing evidence of ethnic cleansing by Islamic State fighters.
"The far-reaching destabilisation of an entire region affects Germany and Europe," Merkel said in a speech to the Bundestag lower house, noting that the Islamist group controlled an area in Iraq and Syria that was half the size of Germany.
"Ladies and gentlemen, when terrorists take control of a vast territory to give themselves and other fanatics a base for their acts of terror, then the danger rises for us, then our security interests are affected," she added.
Germany, weighed down by its Nazi past, has shied away from direct involvement in military missions for much of the post-war era. And even in those conflicts where German troops have been involved, such as Afghanistan, politicians have tended to describe the missions as humanitarian, rebuilding exercises rather than war.
Recent polls show that two in three Germans believe the government should not be sending weapons to Kurdish fighters despite reports of atrocities committed by Islamic State insurgents.
Critics fear the arms could end up in the hands of jihadists. Others worry that Germany, which has not experienced a major attack on its own soil, could become a target itself if it intervenes.
But Merkel noted in her speech that over 400 Germans and hundreds of other Europeans had travelled to the region to join the fight alongside Islamic State, sometimes referred to as ISIS. These fighters could return home at any time, she said, and therefore already represented a direct threat to Germany.
STUNG BY CRITICISM
"We faced a choice: not to take any risks, not to deliver (arms) and to accept the spread of terror; or to support those who are desperately but courageously fighting the barbarous terror of ISIS with limited resources," Merkel said.
"We are aware of the risks of this support, of course we considered them. But we also asked ourselves about the acute risks from ISIS if we do not deliver arms."
Germany has already shipped humanitarian aid and defensive equipment, such as helmets and body armour, to Iraqi Kurds.
On Sunday, the government released a new list which includes 16,000 G3 and G36 assault rifles, 30 Milan anti-tank missile systems, 240 rocket-propelled grenade launchers (RPGs) and 10,000 hand grenades.
The move comes three years after Germany came under sharp criticism from its allies and some critics at home for siding with China and Russia in refusing to back military intervention in Libya in a United Nations vote.
Stung by that criticism, members of Merkel's new "grand coalition" government, including Foreign Minister Frank-Walter Steinmeier and Defence Minister Ursula von der Leyen, spoke out earlier this year about the need for Germany to assume more responsibility in foreign affairs.
Since then, Berlin has played an active role in mediating in the Ukraine crisis and pushing for European sanctions against Russia. The decision to send arms to Iraq represents yet another step in the direction of a more active foreign policy.
"What is new is that in an acute crisis situation, German arms are being delivered in order to influence the crisis, to help a partner and to prevent danger. This hasn't happened before," Volker Perthes, the head of the German Institute for International and Security Affairs told Reuters. "It is clear that something is changing in Germany." (Editing by Dominic Evans)