A draft law allowing Germany to nationalise banks by seizing investors' shares, debated in parliament, could damage the country's reputation as a place to invest, business groups warn.
The legislation paves the way for authorities to push through an emergency takeover of stricken mortgage lender Hypo Real Estate after Berlin failed to persuade US private equity firm JC Flowers to give up its 24 percent stake in the bank.
While similar steps have been taken elsewhere in Europe -- notably in Britain and Ireland -- the law is especially controversial in Germany, which has a poor record of attracting foreign investment and is facing its worst recession in six decades.
In addition, the concept of seizing assets from troubled companies is hotly disputed in Germany for historical reasons.
The idea recalls Nazi seizures of Jewish property in the 1930s and East German confiscation of private businesses after World War II.
But business groups appeared more concerned about the impact of the move on inward investment as Germany plunges ever deeper into the economic gloom.
Dieter Hundt, president of the German employer's federation voiced "outrage" at the move.
"There is no need to do this even as a last resort ... any type of nationalisation or expropriation is out of place and a burden on Germany's position as an investment location," Hundt said.
"Such a serious breaking of this taboo must be avoided."
Hanns Ostmeier, an executive board member of the German Private Equity and Venture Capital Association (BVK) said: "I personally think expropriation is something that is very, very heavy-handed, a very extreme measure."
"My personal feeling ... would be that I feel quite uncomfortable seeing these things happening," Ostmeier told AFP.
He felt the authorities would realise they have probably gone "further than they needed to" once they re-examined the situation.
Considering that Germany is Europe's largest economy and was still the world's largest exporter last year, it boasts a surprisingly poor record in attracting venture capital and private equity.
A recent study by the European Venture Capital Association (EVCA) placed Germany 22nd out of the 27 countries of the European Union in terms of fostering an attractive investment environment.
As a percentage of gross domestic product (GDP), Germany also receives well below the European average of private equity investment, according to EVCA figures, much less than Britain, France and the Netherlands.
The country's image as a place for venture capital investment took an especially strong hit five years ago when a senior German politician described private equity investors as "locusts".
Social Democrat Chief Franz Muntefering said that private equity funds act as "irresponsible locust swarms, who measure success in quarterly intervals, suck off substance and let companies die once they have eaten them away."
Nevertheless, despite their unpopularity with certain politicians, venture capital-backed companies still play a major part in the German economy, employing more than one million people in 2007, according to BVK statistics.
Supporters of venture capital claim such investment provides vital liqudity to businesses that might otherwise struggle to get it and spurs innovation in firms.
This is why the government should be more careful not to push investors away with such radical laws, Ostmeier said.
"These sort of measures have a tremendous potential for a psychological and reputational downside and this is something which is really hard to measure," he said.
"These things have long-term effects."