The German government's rescue package for its banks includes €80 billion in fresh capital and €400 billion in loan guarantees, a finance ministry statement said.
Meanwhile, France will set aside up to €40 billion to recapitalise French banks, President Nicolas Sarkozy said today.
The German measures, in line with others being prepared by other European governments following yesterday's emergency summit in Paris, were discussed and approved by the German cabinet today.
The German government hopes for the package to become law later this week.
In return for its capital injection the German state is expected to take stakes in the banks in a partial nationalisation similar to plans announced in Britain, which other euro zone countries also plan to copy.
Berlin also wants to relax accounting rules so that banks can delay writing off the value of an asset on its books as soon as it falls, press reports said.
Last week Berlin put together a €50 billion rescue of Hypo Real Estate, the country's fourth biggest bank, but this took the form of guaranteeing badly needed credit lines rather than the state taking a stake in the stricken commercial property lender.
Now though a drying up of the amount of liquidity held by German banks - as markets have tumbled in the past week and short-term lending has become even harder to secure - has forced a re-think in Berlin.
It has also become clear that the worst hit are not private German banks like Deutsche Bank but the Landebanks, the regional lending powerhouses that are owned by Germany's 16 states, according to press reports.
By shoring up Germany's banks, Merkel's government is attempting not only to calm stock markets - Frankfurt's DAX lost more than a fifth of its value last week - but also to stop panic bank withdrawals by consumers and to prevent the crisis spreading to other sectors of the economy.
'We are not doing it in the interest of the banks but in the interests of people,' Merkel was quoted as saying over the weekend.
Meanwhile, France will set aside up to €40 billion to recapitalise French banks, President Nicolas Sarkozy said today, revealing details of his plan to rescue the financial sector.
'Nothing will be spared to prevent the crisis getting any worse,' Sarkozy said, a day after 15 European nations met there to draw up a coordinated strategy to end the credit crunch.
France will also guarantee up to €320 billion of interbank loans to shore up the crisis-hit financial sector, Sarkozy said. 'The state will bring its guarantee to the loans that banks require,' he added.
'Money is not circulating anymore. We have to create the conditions to get it moving again. The greatest danger is not to take risks, it is to do nothing,' Sarkozy said.
The president said the state loan guarantee would be charged to banks at commercial rates, and that beneficiaries would have to sign up to certain 'ethical' obligations including on executive pay.
Meanwhile, German Chancellor Angela Merkel said the financial rescue packages would only work if they were accompanied by improved international regulation that will end 'market excesses'.
'Today's measures are the first element of a new financial market charter, but it can only be worthy of the name if it is followed by a second element, namely a change in international rules,' Merkel said.
