Germany’s second-largest mortgage lender, Hypo Real Estate, is on the brink of collapse after a bail-out deal to rescue it fell apart.

The news follows a meeting between the leaders of Europe’s four largest economies including Angela Merkel, the German chancellor, yesterday in Paris where they agreed to work together to combat the economic crisis by stopped short of agreeing a US style rescue package.

The bank said a consortium of German financial institutions involved in a government-led rescue plan pulled out of the negotiations after refusing to come up with nearly £28 billion to rescue the bank. It is know the bank has a large amount of bad debts and like others before it has suffered as a result of the credit crunch.

The reasons the consortium pulled out remain clear but a Hypo Real Estate spokesman said the lender was fighting for its survival.

There are fears the bank cannot survive more that a couple of days without a rescue deal being put in place. A greater fear is the effect the collapse of the bank could have on European stock markets when they open on Monday morning.

Another meeting of government representatives and private bankers is expected to take place on today in order to try to hammer out a deal.

Yesterday the leaders of Europe’s largest economies decided to seek a relaxation of the EU rules governing the amount of money individual states can borrow.

They also issued a joint call for a G8 summit “as soon as possible” to review the rules governing financial markets.

French president Nicolas Sarkozy announced a series of other measures – including unspecified action against the executives of failed banks.

Speaking after the meeting at a joint news conference, he said the four had agreed that the leaders of a financial institution that had to be rescued should be “sanctioned”.

Mr Sarkozy said: “Each government will operate with its own
methods and means, but in a co-ordinated manner.”

Meanwhile German Chancellor Angela Merkel called on EU countries not to take steps at home that could cause problems for other member states.

The Irish and Greek governments have been criticised within the EU for deciding to act independently by guaranteeing to protect all savings deposited in their banks.

UK Prime Minister Gordon Brown, meanwhile, called on European leaders to send the message that “no sound, solvent bank should be allowed to fail through lack of liquidity”.

EU leaders are under pressure to contain the financial contagion

He also said the meeting had agreed to ask the European Investment Fund to release 15bn euros ($21bn; £12bn) in loans to help small businesses operate.