Feb. 15 (Bloomberg) -- German private banks will contribute to a government-led 1.5 billion-euro ($2.2 billion) bailout for IKB Deutsche Industriebank AG, the German bank reeling from U.S. subprime investments, Finance Minister Peer Steinbrueck said.

Banks have agreed to shoulder 300 million euros of the rescue package, Steinbrueck said in a speech to the Bundestag, Germany's lower house of parliament today. The government, which will provide 1 billion euros for the bailout, may also fund the remaining 200 million euros.

``You can imagine that I'm anything but happy about this solution,'' Steinbrueck said. ``But the decision to provide renewed support for IKB is correct.''

The rescue package will bring IKB's total financial aid to about 7.7 billion euros. The bank, which became the first German casualty of the worst U.S. housing crisis in 25 years, has about 22 billion euros invested in assets hit by subprime mortgage defaults and a global credit contraction, according to Deutsche Bank AG analyst Alexander Hendricks.

Repercussions of the worst U.S. housing market may last ``well into 2008'' and imply ``further risks'' for the world economy, Steinbrueck said. German banks mustn't lose time in disclosing risks related to subprime mortgage defaults to help rebuild trust in financial markets.

`Hysteria Inappropriate'

``While there is little reason to make light of the situation, hysteria would be just as inappropriate,'' he said.

Germany's economy, Europe's largest, should weather the impact of financial market turbulence without government measures to boost the economy, Steinbrueck said. In the U.S., President George W. Bush has proposed a $168 package of tax rebates and investment incentives.

``I'm convinced that short-term stimulus programs are not a correct and appropriate reaction,'' Steinbrueck said.

Enacting an economic relief program might cause the European Central Bank to adopt ``a more restrictive'' course and raise interest rates, the minister said. ECB President Jean-Claude Trichet dropped a threat to increase borrowing costs, currently at 4 percent, on Feb. 7 after economic reports showed Europe is being infected by the U.S. slowdown.

Steinbrueck reaffirmed the government's view that growth will slow to 1.7 percent this year from 2.5 percent last year. Although factory orders and industrial production show the economy still in ``robust'' condition, Germany's budget is unlikely to reap any extra tax revenue this year.

``No one can hope for an unexpected tax revenue surplus this year,'' Steinbrueck said.

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

Last Updated: February 15, 2008 05:14 EST