Berlin - German Chancellor Angela Merkel warned Wednesday that Europe's biggest economy was facing tough times and stepped up calls on for new rules to regulate the crisis-hit world financial system.

"Germany is strong," she told the German parliament. "However, Germany will go through a difficult period."

"We have to expect that economic growth in Germany will slow," the chancellor said but she went on to say that it was unlikely that the downturn would result in a sustained economic slump.

Merkel was speaking ahead of a meeting of European Union leaders in Brussels Wednesday, which is likely to be dominated by the financial crisis that was triggered 15 months ago by the shakeout in the US risky subprime mortgage market.

The chancellor's speech also launched a parliamentary debate on a 500 billion euros (683.1 billion dollars) bank rescue package that she unveiled on Monday as part of a concerted effort by governments around the world aimed at shoring up international investor confidence.

Merkel told parliament that Berlin now plans to set up a special expert group headed by Hans Tietmeyer, the former head of Germany's central bank, the Bundesbank to review rules governing the world financial system.

She went on to call again for the International Monetary Fund to play a greater role in overseeing global financial markets.

The German parliament is expected to sign off on the government's rescue package on Friday with the raft of measures including state guarantees to help ease the impact on banks of the global credit squeeze and moves to recapitalize financial houses.

Merkel told German parliamentarians that "the danger for financial market stability had not yet been removed," insisting that the parliament should agree to the rescue package as soon as possible to help with calming financial markets.

In her speech, Merkel also reminded the nation's bankers that Berlin expected them to make some sacrifices in return for the financial assistance being offered by the government and would have to accept conditions for taking up state support.

"This is about protection of citizens, not the protection of banking interests," Merkel said. "We're offering something and they have to offer something in return."

While Merkel was speaking in parliament, European shares snapped two days of big gains to slump by more than 2.0 per cent on renewed recession fears and worries about the impact of a global economic slump on corporate earnings.

On Tuesday, Germany's leading economic research institutes warned that the nation was on the brink of a recession with the think tanks slashing their 2009 economic growth forecasts for the country from 1.4 per cent to just 0.2 per cent.

At the same time, a key survey showed investor confidence in the country plunging this month as a wave of panic selling engulfed global financial markets. (dpa)