Private banks and insurers have agreed to help the authorities in a $68 billion bailout.
A previous offer to buy up Hypo from a consortium of banks had collapsed - and ministers had rushed to find a solution to save Hypo before the markets opened on Monday, in a bid to avoid further volatility.
"With this mutually agreed solution, the institution will be stabilized and with it, Germany strengthened as a place to conduct finance in difficult times," the German finance ministry said in a statement.
In order to shore up consumer confidence in the financial services sector, the European nation has moved to offer a 100 per cent guarantee on savings deposits.
It follows Ireland and Greece in this action - aimed at boosting consumer confidence in banks.
German chancellor Angela Merkel has previously said that she would "pull out all the stops" to rescue Hypo.