Rescue of ailing Hypo comes as Merkel pledges unlimited guarantee for private savings.
However, the agreement fell short of a minimum level of $136,000 that had been proposed prior to the meeting amid concerns in poorer Eastern European countries that would have struggled to meet that obligation.
Nadim Baba, Al Jazeera’s correspondent in Luxembourg, said people across Europe are worried that ministers are not acting quickly enough to bring about some kind of a bail-out plan.
“Medium and big-sized businesses haven’t been hit too hard but there is news today that the automobile industry is Germany is starting to be hit,” he said.
“German carmaker Adam Opel is stopping production at one of its plants for three weeks because of falling demand. Meanwhile, the German unit of Ford is laying 200 part-time people off already as a response to the global financial crisis,” Baba said.
Earlier on Tuesday, Iceland’s government announced that it had nationalised Landsbanki, its second-largest bank, and had held talks to secure a $4bn loan from Russia to prop up the country’s finances.
Iceland had already suspended trading of shares in its major banks on Monday, with the kroner losing about 30 per cent of its value against the euro.
European markets rose on Tuesday’s opening, fell soon after then rose again in afternoon trading.
Frankfurt’s DAX 30 was up 1.34 per cent and the Paris CAC 40 rose 3.02 per cent.
London’s FTSE 100 of leading shares was up 2.99 per cent while in New York the Dow Jones opened up 0.59 per cent.
The developments in Europe came after Asian stocks plunged again on Tuesday, with Tokyo sliding 3.03 per cent to a near five-year low.
Investors remained nervous, although a hefty cut in Australian interest rates brought some relief to Asian markets.
The Reserve Bank of Australia cut rates by a full percentage point, double the amount that was expected and the biggest rate cut since 1992.
The Bank of Japan also injected 1 trillion yen ($9.8bn) into money markets – the 15th straight business day that the Japanese central bank has poured money into the short-term money market as part of efforts by the world’s central banks to ensure a flow of cash vital to the financial system.
But fund injections by central banks have so far been largely ineffective, as have individual government plans to bail out failing financial institutions in the US and Europe.