The European Commission, the EU's competition watchdog, announced an in-depth investigation into some of the more than €100 billion offered by Germany for Hypo Real Estate (HRE).
The probe was described by the Commission as a "first step towards finding a viable long-term solution, in close contact with the German authorities," and said it was "common for state interventions of this magnitude."
It said it had to ensure that the aid was kept to a minimum, restored HRE's long-term survival and minimized the distortion of competition with rival banks.
Germany gained EU approval for a first tranche of aid for HRE worth €35 billion in October, and Berlin has since notified Brussels that further measures are necessary.
HRE specialized in providing cheap funding to local governments but the freezing of short term money markets where it raised funds last year all but destroyed its business model and left it unable to finance its huge debts.
Chancellor Angela Merkel's government is concerned that a collapse of HRE would prompt the sort of financial market chaos that followed the failure of US investment bank Lehman Brothers in September.
On Thursday, the German Financial Markets Stabilisation Fund (SoFFin) said that the government's stake has risen to 47.3 percent after an offer to buy all shares expired.
At a shareholders' meeting on June 2, the government hopes to push through plans for a capital increase which will boost SoFFin's stake to more than 90 percent - the first full nationalization of a German bank since 1949.
One stumbling block might be the stake held by US investment fund JC Flowers, which refuses to sell its shares to the government.
The government rushed through a law allowing an expropriation of JC Flowers's stake but Economy Minister Karl-Theodor zu Guttenberg said on Thursday that this should now be "off the agenda."
HRE said in a statement that it expected the Brussels probe to focus on whether restructuring plans were viable or not and that it would work closely with the Commission, hoping for a ruling by October.
"The group is positive that it will be able to convince the Commission of the viability of its future business model and, on this basis, is confident that the Commission will conclude... with a positive ruling," it said.
The wider banking system in Germany is also beset with serious problems, most notably more than 800 billion euros' worth of "toxic assets" estimated to be on lenders' books.
Last month, senior government ministers held talks on a plan to help banks clean up their balance sheets, possibly by allowing them to park these assets in their own individual mini "bad banks."