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The e and ä are considered as different phonemes. In practice, do people make and notice the difference? Which problems, if any, would not bothering to make such difference lead to?

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In standard pronunciation, short "ä" is [ɛ] and short "e" is [ə], [ɛ], or [e], where the last one occurs in foreign words ("Methode" [meˈtoːdə]) but rarely in native ones ("lebendig" [leˈbɛndɪk]). That means that most of the time, there is no audible difference between short "ä" and "e". For instance, the vowels in "nässer" and "besser" are the same, namely [ɛ].

Long "ä" is [ɛː], long "e" is usually [eː], so the long vowels are clearly distinguished.

Dialects often differ. Many North Germans, for instance, will consistently replace [ɛː] by [eː], and if I remember correctly, there are South German dialects that make a difference between short "ä" and "e".

For non-native speakers: Replacing short [e] by [ɛ] is unproblematic. Short [e] is rare, there is no risk of semantic ambiguities, and many people will simply not notice it. Replacing long [ɛː] by [eː] or vice versa can lead to semantic ambiguities ("ich sehe/ich sähe"). It will be noticed and it's considered as a mistake, but it's a mistake that is also common among native speakers, so I think that you will be understood.

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Would it be possible to give a recipe to correctly pronounce [ɛ]? I mean, to pronounce "ö" I was told to open the mouth as if I wanted to say "o" but then pronounce an [e]. Same for "ü" ([y]): mouth as for saying "u" but then say [ɪ]. With some practice this works. But I got no rule for "ä" so it just sounds as [e] when I say it. –  c.p. May 18 '13 at 16:09
[ɛ] is the first vowel of the diphthong in English "bear" and the vowel of French "être" or Italian "è". Does that help? Try to find a mouth position in the middle between [e] and [a]. –  Uwe May 18 '13 at 16:23
It does help, thanks. –  c.p. May 18 '13 at 16:43

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