The DAX, which encompasses Germany's 30 leading listed companies, plunged nearly six percent in midday trading to under 5,447 points – the index's lowest level since July 2006.
The equity markets were spooked after the stock of troubled bank Hypo Real Estate tanked more than 40 percent despite a new rescue package hammered out on Sunday.
Intense talks between the Finance Ministry, Bundesbank, private banks and market regulators resulted in an additional €15-billion guarantee for HRE, which had already received guaranteed credits worth €35 billion.
“It remains to be seen if the size of this rescue package will be enough this time,” said one trader in Frankfurt.
The ongoing turbulence on global financial markets also caused the German government to offer a blanket guarantee on all bank deposits over the weekend.