"The path that we have taken in order get our country through the crisis means taking on a significant amount of new debt, this year and next," Merkel, who became chancellor in 2005, said as she presented the 50-billion-euro (66-billion-dollar) programme to parliament.

"It must be said clearly, and we don't need to beat around the bush, we did not take this decision lightly. I did not take this lightly. I want to say clearly that it was the most difficult domestic political decision I have had to take as chancellor," Merkel said.

Berlin would pay off the extra debts as soon as possible and intended to change the constitution to ban excessive government borrowing in the future, she said.

Vice-chancellor Frank-Walter Steinmeier, who will challenge Merkel for the Social Democrats in the September general election, said the crisis had hit the German economy "like a tsunami."

The raft of measures, agreed late on Monday by Merkel's governing left-right coalition after last year's first package proved insufficient, is aimed at lifting the world's third biggest economy out of what is forecast to be its sharpest slowdown since 1945.

The main thrust of the new package is a huge increase in spending on roads, railways, hospitals, schools and broadband Internet access. Other elements include cuts in tax and social security contributions, as well as incentives for consumers to buy new "greener" cars to boost Germany's ailing auto sector.

Germany's Institute for Employment Research (IAB) said it could save a quarter of a million jobs.

Merkel also wants to set up a 100-billion-euro fund to help out firms struggling to secure sufficient credit -- or at least loans without painful interest rates -- from hard-up banks still reluctant to dole out cash despite Berlin's 480-billion-euro banking package rushed through last year.

But her efforts will also lead to a huge increase in Germany's debt to the point that it will breach the European Union budget deficit rules in 2010, Finance Minister Peer Steinbrueck told the Financial Times Deutschland.

Germany has in recent years not been slow to highlight how healthy its public finances are compared to those of other EU countries, and has strenuously resisted efforts by France and Italy to water down and even scrap the rules enshrined in the EU Stability and Growth Pact.

But Merkel told parliament that this was "not an expression of bad politics but ... of the crisis itself."

Europe's largest economy entered a recession in the third quarter with two successive three-month periods of shrinking economic output.

Preliminary official figures on Wednesday showed that the slowdown accelerated sharply in the final part of the year, contracting by between 1.5 and two percent -- the sharpest fall in two decades.

"This means the starting point for 2009 is really bad," Commerzbank economist Joerg Kraemer said in a research note.

Analysts worry that Merkel's new effort will be unable to prevent the German economy shrinking -- Berlin is pencilling in a drop of three percent in 2009 -- because of its dependence on exports, demand for which have been dealt a body blow by the global slowdown and a strong euro.

Recent data have made it clear that Europe's biggest economy is going south, with industrial orders and output falling off a cliff and unemployment on the rise in December for the first time in 33 months to stand at over three million.

Figures from the German industrial federation on Wednesday showed foreign orders slumping almost 30 percent in November. Deutsche Bank, meanwhile, the country's biggest bank, unveiled a loss of almost five billion euros for the fourth quarter.

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