March 10 (Bloomberg) -- The German government is considering an alternative to seizing bank assets, Economy Minister Karl- Theodor zu Guttenberg said, signaling a possible retreat from plans to nationalize property lender Hypo Real Estate Holding AG.

The economy and justice ministries are working on a task set by Chancellor Angela Merkel’s Cabinet last month to find a “restructuring model that avoids the seizure of bank assets as a last resort,” Guttenberg told reporters in Berlin today. The model, which is being drafted as legislation, involves “an extension of insolvency law.” It will be ready in a few days, he said.

Merkel’s coalition, facing federal elections in September, is at odds over what to do with troubled banks after pumping 102 billion euros ($130 billion) of funds and guarantees into Hypo Real Estate alone.

Social Democrat Finance Minister Peer Steinbrueck said March 6 that the government needs to gain more than a 75 percent stake in Hypo to save the Munich-based lender. Lawmakers from Merkel’s Christian Democratic Union and their Bavarian sister party, Guttenberg’s Christian Social Union, are wary of scaring investors by resorting to Germany’s first bank nationalization since the 1930s.

Handelsblatt newspaper reported today that the economy and justice ministries are working on a revision to insolvency law that may permit the government to take over banks without owning their assets. The law would involve suspending shareholders’ rights at troubled banks for short periods allowing lenders to restructure, it said, citing unnamed officials.

Legislation now going through parliament will allow the government to sieze Hypo’s shares as an “ultimate” measure to save the lender.

To contact the reporter on this story: Brian Parkin in Berlin at bparkin@bloomberg.net

Last Updated: March 10, 2009 09:52 EDT