The government of the eastern German state of Saxony has decided to sell its stricken lender Sachsen LB to Stuttgart-based LBBW for what sources said was €300 million.
The bank was battered by heavy losses from US sub-prime mortgages and other risky debt amid credit turmoil which has roiled world financial markets.
Germany has borne the brunt of the European fallout so far from problems stemming from subprime home loans as two of the country's banks have almost collapsed, requiring high-profile industry bailouts.
"The cabinet unanimously decided to sell the state's share in SachsenLB," Saxony spokesman Andreas Beese told reporters in the state capital Dresden.
"Representatives of the state have been asked to act accordingly in a meeting of Sachsen LB owners tonight. The government assumes the meeting will approve the sale," he said.
State premier Georg Milbradt earlier said SachsenLB had come under so much pressure that it could not continue its activities without a partner.
SachsenLB would be run by LBBW as a subsidiary and LBBW had secured the right to return it to its owners - Saxony state and local community savings banks - if more unacceptable risks emerged, Mr Milbradt said.
LBBW owners were due to meet later today in Stuttgart.
A source close to the company said LBBW was taking over 100 per cent of Sachsen LB at a price of €300 million.
Sachsen LB is the second German casualty after the near collapse of small-company lender IKB which was saved by a group of banks including state-owned KfW.
In return for a €17 billion euro ($23.1 billion) credit line to keep it afloat, the owners were forced into agreeing to its sale, a milestone in Germany, where few state-owned banks are ever put up for auction.
Sachsen LB's Irish subsidiary was investigated in 2005 and problems with its risk exposure had been found.
A Finance Ministry spokesman said today the government was permanently examining the efficacy of banking supervision and that adjustments could be made if necessary. He added: "A functioning banking oversight is no insurance against wrong decisions being made - which are often only seen as wrong decisions afterwards."