I can tell you for sure that they can monitor your browsing history/behaviour thro. cookies and other means. All the PRISM partners - Google, FB and others do it.They say the data is used to serve you relevant ads.
Yes, JS_Harris. Tracking people shouldn't be that difficult for Google. When there are several metric tools in the market which regularly kiss people to track them, Google, with their infrastructure, can do it much better.But, they using that data to cause ranking problems is weird.