Only hours before her announcement, Mrs Merkel had criticised a comparable move by the Irish government last week, and agreed to work towards a greater cross-border co-ordination of rescue measures.

However, back home she was prompted to take unilateral action to prevent a panic run on banks as the proposed rescue deal for Hypo Real Estate (HRE), one of the biggest German commercial mortgage and public sector lenders, was on the verge of collapsing.

The deal was threatened when a consortium of German banks pulled out after the stricken bank revealed that the amount needed for its rescue was far higher than expected, and a new rescue plan had to be established. A collapse of HRE, which has business operations all over Europe, would have had repercussions for the whole continent.

“We won’t allow the crisis in a single institution to become a crisis for the whole system,” pledged Mrs Merkel, “we owe it to the taxpayers.” With the introduction of the new guarantee, the former legal limit which guaranteed 90 per cent of all bank deposits up to €20,000 per account will be abolished.

The German pledge has heightened the pressure on the British Government to offer a similarly extensive guarantee, instead of just increasing the limit up to which savings accounts and deposits are protected from £35,000 to £50,000 per bank.

Gordon Brown had so far resisted such a dramatic step fearing the exposure it would give taxpayers. However, politicians like Liberal Democrat leader Nick Clegg said: “Ireland’s action last week to guarantee all deposits made a common European approach to deposit guarantees necessary. Germany’s decision today makes it completely unavoidable.”

“Germany is Europe’s economic superpower. Where it leads, others are bound to follow,” Mr Clegg added. However, new Business Secretary Peter Mandelson warned that “the danger of this crisis is that it may spark a new wave of economic nationalism.”

The Bank of England and the Treasury are considering a range of other measures to support the banking system, including the injection of further money into the system to ease the pressure on British banks and to purchase ‘toxic’ mortgage-related assets.

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