Oct. 13 (Bloomberg) -- Germany will provide as much as 500 billion euros ($681 billion) in loan guarantees and capital to bolster the banking system, the country's biggest government intervention since the Berlin Wall came down in 1989.

Chancellor Angela Merkel's government pledged 400 billion euros in loan guarantees, provided as much as 80 billion euros to recapitalize banks in distress and set aside 20 billion euros in its budget to cover potential losses from loans.

The rescue package will amount to about 20 percent of the gross domestic product of Europe's largest economy. Measures taken by the U.K. government and the Bank of England included emergency loans and lending guarantees totaling 500 billion pounds ($865 billion), about 30 percent of GDP. The U.K. government today provided an unprecedented 37 billion-pound bailout for Royal Bank of Scotland Group Plc, HBOS Plc and Lloyds TSB Group Plc.

``We're taking measures in order to prevent a repeat of what we've just experienced,'' Merkel said following a cabinet meeting in Berlin today. ``These are sweeping steps but they're necessary to restore market confidence.''

The government may influence management decisions and limit dividends at banks that get capital. It will also propose improving market supervision. Following today's approval by the cabinet, the rescue package is due to be ratified by Germany's two houses of parliament by the end of the week.

Time Wasted

Merkel said crisis-relief measures adopted by governments won't suffice to calm financial markets over the long term. She renewed her calls for consolidated international action to strengthen the International Monetary Fund's role in bank supervision, improve the work of credit-rating agencies and increase transparency of financial products.

``It's high time for the international community to draw the right conclusions from all of this,'' Merkel said. ``We have already wasted a lot of time'' resisting international changes.

Germany's announcement follows an agreement yesterday by leaders of the 15 nations using the euro to guarantee new debt and use taxpayer money to protect troubled lenders. As part of the plan, the government said it will take ``short-term'' steps to guarantee so-called pfandbriefe, or covered bonds, while the Bundesbank pledged measures to ensure the liquidity of money- market funds.

Stock-Market Rally

The plan provides a ``chance that short-term money markets will become liquid again and that the banking system may stabilize after all,'' said Konrad Becker, a Munich-based analyst at Merck Finck & Co.

Stocks rallied worldwide today after European governments announced measures to shore up financial institutions and central banks pumped unlimited dollar funds into the money markets.

The MSCI World Index, which plunged 20 percent last week, rose 2 percent. Germany's DAX Index jumped 11 percent to 5,062.45, the steepest gain since the measure was created in 1988. Money-market rates as measured by the London interbank offered rate, or Libor, for three-month dollar loans dropped 7 basis points to 4.75 percent today, tied for the largest drop since March 17, the British Bankers' Association said.

German banks, including state-owned lenders, have been increasingly hit by the world financial turmoil. The cracks in the system widened after Hypo Real Estate Holding AG needed a 50 billion-euro bailout as its Dublin-based Depfa Bank Plc unit, which lends to governments, failed to get short-term funding amid the credit crunch.

Altogether, Germany's seven state-owned Landesbanks have booked more than 15 billion euros in writedowns related to the collapse of the U.S. subprime mortgage market.

``What's at stake is to protect Germany from major damage,'' Finance Minister Peer Steinbrueck told a Berlin news conference today. ``The steps we're taking are intense.''

To contact the reporter on this story: Andreas Cremer in Berlin at acremer@bloomberg.net.

Last Updated: October 13, 2008 12:02 EDT