German chancellor Angela Merkel has announced the German government will guarantee all private savings accounts, as the country’s second largest mortgage lender struggles for survival.

Hypo Real Estate is in trouble after a £28 billion rescue plan collapsed late on Saturday. The bank has said it will study alternative measures to fund its business.

Ms Merkel attended an emergency meeting of financiers and govermnet representatives in an effort to try to broker a new deal to save the bank from collapse. There are fears that if the bank were allowed to colapse it would further undermine confidence in European stock markets.

The news that the deal had fallen through came only hours after the leaders of the four largest economies in Europe met on Saturday to agree greater cooperation between their governments to combat the financial crisis. The leaders came out of the meeting saying they had agreed on a number of actions to be implemented, said to include sanctions against the bosses of banks that failed. But they said they were not prepared to go as far as a US style rescue package.

Ms Merkel had previously been strongly critical of the Irish and Greek governments’ decisions to take independent action to protect all savings deposits.

But she said: “”We will not allow the distress of one financial institution to distress the entire system. For that reason, we are working hard to secure Hypo Real Estate.”