German Chancellor Angela Merkel's government moved a step closer to seizing control of Hypo Real Estate Holding AG after the upper house of parliament backed a bill that allows the forced nationalisation of banks for a specified time period.

Germany's finance minister Peer Steinbrück has said the bill is solely aimed at Hypo Real Estate, in which the government took an initial 8.7 per cent stake last week. Hypo has already received €102 billion in loans and state guarantees.

Forced nationalisation of the bank and the expropriation of Hypo shares from shareholders is planned as an option if the government fails to secure a controlling majority in the bank, which it believes is necessary to restructure the Munich-based lender. It seeks to gain a stake of more than 90 per cent.

The bill foresees that an expropriation of shareholders will be possible only if the finance ministry can't find an alternative buyer. As a second precondition, a shareholders' meeting must have failed to generate a majority for capital measures, or if the decision can't be included in the official registry in time. Hypo Real Estate shareholders are entitled to appropriate compensation.

The government is in talks with Hypo's largest shareholder, investor J Christopher Flowers.. Flowers wants to keep a stake and help the German government restructure the bank, saying that a 75 per cent-plus-one-share majority holding by the government would be sufficient for a revamp.

Flowers is the founder and managing director of private-equity investor J C Flowers & Co, which coordinates an investor group that holds about 23.7 per cent of Hypo Real Estate.

Flowers said on Friday that the group "remains open to constructive talks" with the financial markets stabilisation fund of the German government, or SoFFin, but also "reserves the right to pursue other options".

Flowers demanded that Hypo receive ''equal treatment'' to other troubled German banks. He held out the possibility of ''legal recourse'' to safeguard the interests of its investors. 

''We do not understand why HRE and its shareholders are not being treated in the same way as other systemically important banks in Germany which have had to seek government assistance,'' Flowers said in an e-mailed statement. 

All but one of Germany's 16 states represented in the upper chamber, the Bundesrat, voted for the law, sweeping aside concerns that investors may be scared off by the prospect of the first bank nationalization since the 1930s. The lower house backed the law 20 March after inserting caveats that make seizure of Hypo an instrument of last resort. The bill just needs the signature of President Horst Koehler to become law. 

''Economic stimulus programmes that Germany's launched risk coming to nothing unless we can help banks to get on their feet again and start lending,'' Willi Staechele, the Christian Democrat finance minister for Baden-Wuerttemberg state, said in the upper chamber. ''This law is a necessary step in that direction.'' 

Finance minister Steinbrueck told the lower house of parliament on 6 March that he seeks control of more than 75 per cent of Hypo to pursue its restructuring without the risk of legal challenge by shareholders. 

The law's passage through parliament has exposed strains in the ruling coalition over policy to combat the worst recession since World War II. Christian Democrats such as Otto Bernhardt, finance spokesman for Merkel's party, say the law may dissuade investors. Steinbrueck's Social Democrats have few such scruples after the government handouts since September. 

Baden-Wuerttemberg, North-Rhine Westphalia and Bavaria were among the states that sought last-minute changes to the bill, threatening to hold up its passage. Steinbrueck ended the spat by promising ailing state banks as much tax relief on losses as is offered to private banks within the scope of Germany's 500 billion-euro bank-rescue programme.