Berlin  - Chancellor Angela Merkel threw her weight Tuesday behind a government guarantee for troubled German mortgage lender Hypo Real Estate (HRE), saying she assumed the lifeline would be extended this week.

She said the package was a "confidence-building measure" that would have "incredibly important meaning" for the economy in Germany.

Axel Weber, president of the Bundesbank, stood at her side and added the step was vital to bring long-term stability to the bonds market that supplies credit to Germany's mid-sized enterprises.

The government agreed Sunday to post a guarantee of 26.6 billion euros (38 billion dollars) for HRE, while German commercial banks are to protect HRE from default with up to 8.5 billion euros.

Opposition politicians in Germany questioned the need for the lifeline.

Merkel spoke just after meeting legislators of her own Christian Democratic Union (CDU) in Berlin.

HRE stock, which plunged Monday as the 35-billion-euro bail-out was announced, traded at 4.34 euros in Frankfurt on Tuesday, up 0.8 per cent overnight.

HRE, founded in 2003, is Germany's second-biggest mortgage lender, but mainly lends to commercial developers and local bodies, not to private home-owners.

Its public-finance unit, Depfa, was caught 35 billion euros short when other lenders withheld short-term money. (dpa)