BERLIN: German Chancellor Angela Merkel on Saturday said it was "critical" that banks boost lending as Europe's biggest economy seeks to recover, adding she would appoint a mediator to address the problem.

"We are in a critical situation" when it comes to the financing of large and medium-sized businesses, Merkel said in her weekly Internet address.

Banks must act in a responsible manner, she said, but "they also have responsibilities to the whole of society as economic overseers."

"That is why we are saying very clearly that we are demanding that financial institutions fulfill their responsibilities," said Merkel, who plans to discuss the issue in a Wednesday meeting with experts as well as union and banking officials.

Her government will name a mediator who will work to help businesses obtain financing from banks, she said, adding she hoped the country's 16 regional states would do the same.

"The crisis is not over," Merkel said.

She said, however, the country's economy would contract less than previously expected this year -- four to five percent compared to earlier estimates of six percent.

Spiegel magazine reported in its edition to appear on Monday that the government was prepared to offer 10 billion euros (15 billion dollars) in guarantees for bank loans from a special fund to combat the economic crisis.

The move is expected to allow banks to open up some 100 billion euros in new credit, with fears that a lack of financing is harming Germany's recovery.

Germany is emerging from its worst recession since World War II in large part owing to huge injections of cash -- some 80 billion euros (119 billion dollars) -- from the state.

But the country's central bank recently warned that German banks may still have to write down up to 90 billion euros by the end of next year because of the crisis.