The announcement came as German officials tried to revive a bailout proposal for a major lender, The Washington Post reported Sunday.
"We want to tell savers that their deposits are safe," Merkel said at a news conference one day after an emergency summit of European leaders.
Merkel met in Paris Saturday with French President Nicolas Sarkozy and prime ministers Gordon Brown of England and Silvio Berlusconi of Italy. The leaders said afterward they would act on their own to shore up failing financial institutions and banks rather than sign onto a formal continent-wide plan.
However, they said they were planning a global economic summit to examine whether overhauls are needed for the existing World War II-era international financial system.
The deposit guarantee announced Sunday came officials learned that the collapsed commercial property lender Hypo Real Estate was worse off than previously expected, officials said.
The German Finance Ministry announced a $69 billion bailout plan for Hypo that would have the government contribute $37 billion while private lenders made up the difference, the Post said.