Philipp Holzmann AG employees demonstrating in front of the Brandenburg Gate in Berlin yesterday - almost 70,000 jobs are in jeopardy. Photograph: Reuters

Germany's Chancellor Mr Gerhard Schroder will meet bankers in Frankfurt this morning in a last-ditch effort to save the 150 year-old construction giant, Philipp Holzmann, which filed for bankruptcy yesterday.

The fate of almost 70,000 jobs hangs on the outcome of the talks but Mr Schroder knows that failure to save the stricken firm could also herald the beginning of the end for his centre-left government.

"Don't leave them in the lurch!" screamed the headline in yesterday's mass-circulation Bild newspaper, next to a picture of a group of Holzmann workers protesting in the snow.

The chancellor has promised to do all he can to persuade the company's 30 creditor banks, led by Deutsche Bank and Commerz bank, to put together a 2.5 billion deutschmark rescue package. The banks came close to agreeing a deal during 15 hours of negotiations on Monday but, amid mutual recriminations, fell about DM250 million short of a full bail-out.

Government sources indicated yesterday that the chancellor could offer to contribute up to DM300 million from state funds to top up the rescue package.

"I am just not ready to accept that a company that is still a going concern should go bust because of a mistake made by its management. It is the government's role to ensure that does not happen," Mr Schroder said.

The crisis at Holzmann comes in the wake of Vodaphone's hostile bid for the German mobile telecommunications company, Mannesmann, which has united Germany's politicians and commentators in outrage.

Hostile takeovers are unknown in Germany and Mr Schroder spoke for most of his compatriots when he expressed disquiet over the bid, which could threaten thousands of jobs in the country's most populous state, North Rhine Westphalia.

The chancellor's Social Democrats (SPD) face a tough battle to maintain control of the state in elections next May and local activists fear that, unless the Vodaphone bid is halted, voters could desert the party in droves.

Many SPD supporters are already unhappy about the government's economic policies, especially a massive package of public spending cuts the chancellor is hoping to push through parliament this week. There is also growing disquiet over a recent wave of privatisation and liberalisation in such industries as telecoms and energy which have pushed prices downwards but left thousands of workers feeling insecure.

Mr Schroder came to power promising to cut Germany's dole queues but, although the economy is improving, there is little sign of unemployment falling. The collapse of Holzmann with the loss of 68,000 jobs, mostly among suppliers to the firm, would represent a massive blow to the chancellor's image as a dynamic leader who can persuade business to act in the public interest.

Although Holzmann has been in business for 150 years and is responsible for some of the biggest construction projects in the German capital - often using Irish sub-contractors - the company's troubles did not begin in earnest until 1995, when it lost DM360 billion. As the debts crept upwards, Holzmann's bankers - some of which are represented on the company's advisory board - continued to extend credit but did little to influence a disastrous management.

Some of the company's creditors accuse Deutsche Bank of quietly reducing its lendings to Holzmann by DM300 million during the past few months, as the bank's representatives on the advisory board realised that the firm's troubles were terminal.

The conservative newspaper Die Welt yesterday described the Holzmann debacle as a disgrace for the company's executives, its board and for Germany's auditing system.

"It shows once more that the German auditing system is in urgent need of reform. When the largest shareholder is also the largest creditor and holds the chair on the advisory board, it can only have a conflicting interest in supervision - which is bad," the paper said.

Although most Germans are happy to blame the banks for the crisis, many feel that their economic system has endured a surfeit of reform in recent years and some - particularly among SPD supporters - feel that market forces have become too powerful.

For many Germans, the liberalisation of the electricity industry is a privatisation too far - despite the fact that energy bills have plummeted since the introduction of competition.

Many German local authorities generate and supply energy and use the profits to subsidise such worthy services as bus lines to remote villages or schools for children with special needs. Most of these publicly owned energy companies have had to slash prices in recent months in the face of brutal competition from new, commercial rivals.

If profits disappear, the local authorities may have difficulty funding socially responsible but commercially unviable projects - a consequence that even the most business-friendly German commentators regard as too high a price for cheap energy.

Mr Schroder yesterday left the banks in little doubt about what he expects from today's talks.