"The path that we have taken in order get our country through the crisis means taking on a significant amount of new debt, this year and next," Merkel, who became chancellor in 2005, said as she presented the €50-billion ($66-billion) programme to parliament.
"It must be said clearly, and we don't need to beat around the bush, we did not take this decision lightly. I did not take this lightly. I want to say clearly that it was the most difficult political decision I have had to take as chancellor," Merkel said.
Berlin would pay off the extra debts as soon as possible and intended to change the constitution to ban excessive government borrowing in the future, she said.
Vice-chancellor Frank-Walter Steinmeier, who will challenge Merkel for the Social Democrats in the September general election, said the crisis had hit the German economy "like a tsunami" and said Berlin had to act quickly. "Waiting around was and is not an option," Steinmeier, who is also foreign minister, told the Bundestag lower house.
The raft of measures, agreed late on Monday by Merkel's governing left-right coalition after last year's first package proved insufficient, is aimed at lifting the world's third biggest economy out of what is forecast to be its sharpest slowdown since 1945.
The main thrust of the new package is a huge increase in spending on roads, railways, hospitals, schools and broadband Internet access. Other elements include cuts in tax and social security contributions, as well as incentives for consumers to buy new "greener" cars to boost Germany's ailing auto sector.
Merkel also wants to set up a €100-billion fund to help out firms struggling to secure sufficient credit - or at least loans without painful interest rates - from hard-up banks still reluctant to dole out cash despite Berlin's €480-billion banking package rushed through last year.
But Merkel's efforts will also lead to a huge increase in Germany's debt to the point that it will breach the European Union budget deficit rules - which Germany championed - in 2010, Finance Minister Peer Steinbrück told the
Financial Times Deutschland.
Germany has in recent years not been slow to highlight how healthy its public finances are compared to those of other EU countries, and has strenuously resisted efforts by France and Italy to water down and even scrap the rules enshrined in the EU Stability and Growth Pact.
But Merkel told parliament that this was "not an expression of bad politics but ... of the crisis itself."
Europe's largest economy entered a recession in the third quarter with two successive three-month periods of shrinking economic output. Preliminary official figures on Wednesday showed that the slowdown accelerated sharply in the final part of the year, contracting by between 1.5 and two percent.
"This means the starting point for 2009 is really bad," Commerzbank economist Jörg Krämer said in a research note.
Analysts worry that Merkel's new effort will be unable to prevent the German economy shrinking - finance ministry officials are pencilling in a drop of three percent - because of its dependence on exports, demand for which have been dealt a body blow by the global slowdown and a strong euro.