Economic Plan

The remarks came after a meeting of state leaders on Thursday to discuss a possible new steps to boost Europe's biggest economy.

The chancellor said Germany's 16 states will help finance a second national recovery package to be announced next year.

"All the states will approve a second package in January," Merkel told a press conference in Berlin.

They will all "contribute to the extra investment," she said, adding that the infrastructure package aimed at streets, rail tracks, schools and kindergartens is made up of "projects that will modernize our country for the long term."

Berlin has already laid out a package worth 31 billion euros to fight a recession triggered by the global credit crunch, but Merkel has been accused of timidity as European neighbors lay out plans for even more public spending to kick-start their troubled economies.

Build, don't bail out

Merkel has committed herself to infrastructure spending, arguing that it is a surer way of stimulating the economy than giving tax handouts. She says Germans are more likely to hoard handouts as savings, and not spend them to help keep the economy afloat.

But her stance on that issue has also come under fierce criticism internationally. Other governments say it is important to boost consumer spending as well as public investment.

Press reports have suggested that Berlin is now preparing to invest another 30 billion euros ($42 billion) to pull the German economy out of recession, or at least help it weather the worst of the storm.

But Merkel has said the plan will only be unveiled after US president-elect Barack Obama takes office January 20 and puts forward similar measures.

Shift in priorities

Merkel, who wants new public investments in infrastructure and transportation, said Thursday all the federal states would benefit from the next package. But eastern Germany will not, as previously, be given priority, she warned.

After nearly 20 years of heavy public spending to help rebuild Germany's former communist eastern regions, "there's now a backlog of need" in western Germany, Merkel had said in an interview published Thursday in the political magazine Cicero.

The interview sparked controversy, since it has been an unwritten rule in German politics to avoid comparing 1970s and 1980s facilities in the western region with the east's fast roads, restored town centers and new industrial areas that have all benefited from 19 years of massive federal spending. More than one trillion dollars have been transferred from west to east.

However, former East Germany still suffers from poverty, under-investment and high levels of unemployment.