Germany agreed to a 1.5 billion euro ($2.19 billion) rescue package for IKB, the third bailout for the subprime-stricken German lender, saying a collapse of the bank would have "incalculable" consequences.
The corporate lender has become one of Germany's highest-profile casualties of the global credit crisis since it nearly went under in late July.
IKB has already been propped up by two rescues costing more than 6 billion euros ($8.74 billion), with state-owned bank KfW shouldering the lion's share.
But recently it came under threat again in the face of new write-downs on billions of euros of toxic investments that remain on its books.
"After lengthy talks we have decided to do all we can to save IKB," Economy Minister Michael Glos said after a meeting of the supervisory board of KfW, IKB's top shareholder.
Finance Minister Peer Steinbrueck, who is also on the KfW board, said the package involved 1.5 billion euros in financial aid, of which the federal government would take on 1 billion euros.
The government did not say how it would fund that sum and said it was counting on German banks, which have participated in previous bailouts, to put up the remaining 500 million euros.
"The potential fallout from an IKB insolvency is incalculable," Steinbrueck told reporters at KfW headquarters in Berlin, adding that the bailout would have no additional impact on Germany's 2008 budget but would have an effect in subsequent years.
The government is expected to begin talks with German banks in the coming days. Already on Wednesday, Germany's DSGV savings bank association and the country's cooperative banks group said they were unwilling to do more for IKB.
Officials said the government was counting on private banks to put up the lion's share of the half a billion euros. The country's private banks association (BdB) declined to comment on whether it would contribute.
Up to the Banks
"Now it's up to the banks," Juergen Koppelin, a member of the liberal Free Democrats (FDP) who sits on the KfW board, said after the meeting. "Without the banks this won't work."
Sources with knowledge of the matter told Reuters on Tuesday that KfW was considering selling shares it holds for the government in Deutsche Post to pay for the rescue.
Deutsche Post shares ended down 0.9 percent on Wednesday at 21.65 euros. IKB stock closed up 5.78 percent at 5.86 euros. A year ago they stood above 30 euros.
The troubles at IKB have piled pressure on KfW Chief Executive Ingrid Matthaeus-Maier, with politicians from Chancellor Angela Merkel's conservative bloc and the FDP calling for her resignation.
Steinbrueck, whose top deputy Joerg Asmussen sits on the IKB supervisory board, has repeatedly deflected responsibility for the bank's woes and blamed its management. But he has not escaped criticism.
"When you burn billions in cash, you have to ask who holds the political responsibility," Frank Schaeffler, a finance expert with the FDP, told n-tv television on Wednesday.
"KfW has the political responsibility in Germany. On the one side its CEO Matthaeus-Maier and on the other the finance minister, Mr. Steinbrueck, who has supervised KfW's finances."