Deputy economy minister Walther Otremba told AFP on Wednesday that Germany could see economic activity contract by up to 3.0 per cent next year, which would mark the worst recession in its post-war history.

A detailed forecast would be issued in January, 'when new data on the economy provide a clearer picture,' Mr Otremba said.

The danger of a deep and painful downturn appeared to light a fire under Ms Merkel, and she assured business leaders on Tuesday that they could expect a firm response from Berlin early next year.

'We will take action again in January - another few billion could come together,' she said in a speech in the western city of Mannheim.

Press reports have said Berlin is preparing to invest up to another 30 billion euros (S$61.2 billion) to drag the economy out of its slump.

But Ms Merkel has said the plan would only be unveiled after US President-elect Barack Obama takes office Jan 20 and puts forward similar measures, with a much bigger number expected on the bottom line.

Berlin has already laid out a package worth 31 billion euros to fight the crisis, but Merkel has been accused of timidity, or worse, as European neighbours lay out plans to kick-start their economies.

Nobel-prize winning economist Paul Krugman wrote this week in the New York Times that Merkel was 'clinging to an out-of-date ideology' and 'standing in the way of action' by the European Union as a whole.

But Berlin has worked hard to reduce its public deficit, and officials are not keen to undo that by resorting to massive spending of the kind announced in Britain, France and the United States.

Some officials suspect that calls for a stronger German stimulus are a cover for getting the taxpayer to bail out free-spending EU neighbours.

Ms Merkel has also warned that state aid alone could only 'help in a limited way' to end the recession and has ruled out a voucher plan for consumers which was mooted in the German press.

Economy Minister Michael Glos has pushed for a tax cut to get traditionally thrifty German consumers to spend more, and told ZDF television he was 'rather sure that tax cuts will be a part' of the second government plan.

Ms Merkel has ruled out across-the-board tax cuts until after the general election in September, which she is the favourite to win.

But she said on Tuesday that fresh investment could go toward infrastructure improvements including roads, broadband communications networks and renovation of schools, as well as help for firms that reduce working hours instead of firing staff.

She has called a meeting with Germany's 16 state premiers on Thursday to draw up a list of projects that could be completed quickly.

Ms Merkel has also called on German businesses to contribute to a joint effort, but although large companies have said they would avoid mass job cuts, smaller firms said that this was unrealistic for them in the midst of a deep recession.

Several companies listed on Frankfurt's DAX stock index have said they would not resort to redundancies, but Ms Merkel acknowledged that small and medium-sized enterprises faced different problems, saying: 'I know that not every SME can promise this.'

Such firms, which employ about 70 per cent of German workers, are sceptical about job pledges as the country remains mired in recession.

'A general protective shield for jobs is well-meant, but sadly an illusion,' the head of the German DIHK federation of chambers of commerce, Martin Wansleben, told the daily Sueddeutsche Zeitung on Wednesday.

In November, Berlin approved a raft of measures including tax breaks and infrastructure spending which Merkel said was worth 31 billion euros over two years and would stimulate 50 billion euros worth of economic activity.

The government has also pushed through a 480-billion-euro package of loan guarantees for the critical banking sector. -- AFP