Chancellor Angela Merkel has moved to rescue Hypo Real Estate - and has also raised the compensation limit for savers.
The pressure continues to build on the European financial services sector, as German ministers announce another bank bailout.
Hypo Real Estate is the recipient of a new £39 billion rescue package, after the government joined forces with banks and insurers in order to prevent the firm from collapsing. A previous agreement with a consortium of banks to take over Hypo had failed - and the authorities had rushed to find a solution before the markets opened this morning.
Germany has also now become the third EU nation, after Ireland and Greece, to impose temporary 100 percent protection for savers' deposits against their bank collapsing, in a bid to boost confidence. The UK, which is itself to raise the deposit guarantee limit from £35,000 to £50,000 tomorrow, is expected by analysts to follow suit in offering an absolute guarantee in the near future.
Last week, there were signs of a "flight to safety" among UK savers, with 100 percent guaranteed bodies such as the public-owned National Savings & Investments and the Post Office - whose savings accounts are operated by the Bank of Ireland - reported increased business.
"With this mutually agreed solution, the institution will be stabilised and with it, Germany strengthened as a place to conduct finance in difficult times," the German finance ministry said in a statement.
"The solution guarantees the stability of the Hypo Real Estate group, which will have enough liquidity and will be able to continue functioning even as the financial crisis continues," Hypo chief executive Georg Funke added.
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