The rescue came after a weekend of frantic negotiations after an earlier rescue plan for the embattled lender fell apart when a consortium of banks pulled out of the deal. That package had a price tag of 35 billion euros.

The German finance ministry said in a statement that the new deal will see the financial sector topping up that sum with an additional 15 billion euros.

"With this mutually agreed solution, the institution (Hypo Real Estate) will be stabilized and with it, Germany strengthened as a place to conduct finance in difficult times," the statement said.

On Monday, German Finance Minister Peer Steinbrueck said he would not rule out increasing the government's gurantee for Hypo Real Estate (HRE) which is worth almost 27 billion euros.

HRE on Monday hailed the bailout, saying it would allow the company to keep functioning amidst the ongoing financial crisis.

"We are very thankful for the backing of all those involved," HRE boss Georg Funke said in a statement. "The solution guarantees the stability of the Hypo Real Estate Group, which will have enough liqudity and will be able to continue functioning even as the financial crisis continues," Funke added.

Government keen to avoid knock-on effect, panic

Speaking to reporters before the deal was announced, Merkel said the government was "pulling out all the stops" to save Hypo Real Estate (HRE).

"The government says today that we will not allow an institution's crisis to become a crisis for the entire system," Merkel said.

Merkel's government had scrambled to reach a deal before Asian markets opened Monday, fearing the company would not last long for more than a few days without a rescue package.

The chancellor also warned that managers at financial institutions should be held accountable for what she termed irresponsible behavior. "We owe that to the taxpayers in Germany," she said.

In a further move to shore up the German banking system, the government issued a guarantee for all savings in German banks.

In a bid to stave off panic withdrawals, Finance Minister Peer Steinbrueck assured that German bank account holders need not worry about losing a "single euro" in the crisis.

"That is an important message intended to create calm and not reactions that would be disproportional and make the current crisis management and crisis prevention even more difficult," Steinbrueck said.

Finance ministry spokesman Torsten Albig told business daily Handelsblatt that the estimated value of the guaranteed accounts would total 568 billion euros.

HRE management under fire

Hypo Real Estate, Germany's second largest commercial property lender is the first German blue-chip company to seek a government bailout.

HRE, which mainly lends to commercial projects and to build public facilities such as airports and roads, is the biggest German casualty of the crisis that has spread from New York in the last month.

Steinbrueck had earlier said he was "outraged" at the management of the HRE group because a "further liquidity gap in billions (of euros)" had materialized.

"The German government refuses to be forced into any co-responsibility by this banking institute," he said.

HRE ran into trouble mid-September after a credit freeze following the collapse of US investment bank Lehman Brothers. It has also been badly hit by the dwindling finances of its Dublin-based subsidiary Depfa.