Berlin  - Germany's President Horst Koehler signed a controversial bill into law Tuesday enabling the state to seize control of troubled mortgage lender Hypo Real Estate (HRE).

The measure, described as a last resort to stabilize the German financial market, marks the first time in modern-day Germany that bank shareholders face possible expropriation.

The approval followed adoption by both chambers of the German federal parliament and comes after the government took an 8.7-per- cent stake in the shaky lender as a first step to gaining full control.

The German government has given the Munich-based bank 87 billion euros (117 billion dollars) in state guarantees since it got into difficulties in October last year. The financial sector provided a further 15 billion euros.

Facing fierce criticism from conservatives, who consider a forced takeover akin to communism, the government of Chancellor Angela Merkel has said it would only forcibly take control of the bank as a last resort.

The new law would require a general meeting, at which bank shareholders would vote on a takeover offer by state banking fund SoFFin which they effectively cannot refuse. If Berlin's rescue plan were rejected at that stage, the state would step in as a "last resort."

Hypo Real Estate chalked up a loss of 5.5 billion euros in 2008, the biggest of any German firm. Without government involvement the bank would collapse.

The problems developed at its Dublin-based subsidiary Depfa, which had trouble refinancing loans after massive losses on structured- finance investments. Depfa is Germany's key lender to municipalities.

The law will expire by the end of June, meaning a takeover would have to be initiated before then.

In return for the funds it has put into the bank, Germany wants to take full control in order to ensure that shareholders cannot block restructuring measures. The legislation was passed quickly because of the time pressure.

The move has been opposed by US investor Christopher Flowers, who owns nearly 24 per cent of the bank and feels a government stake of 75 per cent plus one share would be sufficient.

Flowers has lost 1 billion euros since he paid 22.5 euros per share for his stake at the start of the global financial crisis.

Hypo Real Estate's main business is lending money to municipalities to build highways, schools and other infrastructure projects. (dpa)