By Arno Schuetze
FRANKFURT (Reuters) - The German government denied that it was working on a rescue of Deutsche Bank <DBKGn.DE> after a newspaper report about such plans fueled fears over the future of the biggest lender in Europe's largest economy.
European Central Bank President Mario Draghi said that the bank's low interest rate policies were not to blame for the German group's problems but declined comment on whether the state should step in to help.
Deutsche is fighting a fine of up to $14 billion from the U.S. Department of Justice and concerns over its stability had pushed shares to a record low on Tuesday.
Faced with a costly bill for litigation, Deutsche is getting rid of non-core businesses and said on Wednesday it had sold its British insurance business Abbey Life in a $1.2 billion deal.
The German finance ministry moved swiftly to dismiss a report that a rescue plan was being prepared in case Deutsche was unable to raise capital to pay legal bills which include cases dating back to its expansion before the financial crisis.
Weekly Die Zeit had reported that the government and financial authorities were working on possible steps to enable Deutsche to sell assets to other lenders at prices that would ease the strain on the lender.
The paper said that the German government would even offer to take a direct stake of 25 percent if needed. It added, however, that it still hoped Deutsche would not need state support and that only scenarios for a rescue were being discussed.
"This report is wrong. The German government is not preparing any rescue plan, there is no reason to speculate on such plans," the finance ministry said in a statement.
There seems also to be little prospect of a change in course to the rock-bottom interest rates that hit Deutsche's returns and those of its rivals.
"If a bank represents a systemic threat for the euro zone, this cannot be because of low interest rates - it has to do with other reasons," Draghi told reporters.
Despite the denial of possible state help, the episode prompted criticism of both the government and Deutsche by Sahra Wagenknecht, a prominent member of the opposition far-left Linke party.
Wagenknecht said the government had not "defused the explosive business model" of the bank and instead put "a ticking time bomb in the lap of the taxpayer".
Her comments underscore how politically difficult any state support for the struggling bank would be as the country moves towards national elections in 2017.
Throwing further cold water on speculation about a rescue, two sources close to the matter said that German financial regulator Bafin was not working on an emergency plan.
A Deutsche Bank spokesman referred to an interview Chief Executive John Cryan gave German daily Bild on Wednesday and denied the report.
"At no point did I ask the chancellor for support. Neither did I suggest anything like that," the Briton told the newspaper in response to a report that said he had asked Angela Merkel for her backing with the $14 billion U.S. demand to settle claims it missold mortgage-backed securities.
Deutsche Bank shares, which have lost around half their value this year, gained 2 percent on Wednesday.
Squeezed by low interest rates, German banks have been seeking ways to boost revenue by passing on costs to corporate customers but profit margins remain thin in one of Europe's most competitive banking markets.
Deutsche is in the midst of a deep overhaul that includes slashing jobs from a workforce of around 100,000, revamping information technology and shrinking non-core assets.
Commerzbank, Germany's second largest lender and in which the government holds a stake of more than 15 percent, is expected to cut around 9,000 jobs in the coming years.
In contrast to some European peers, Deutsche is sticking with its strategic focus on investment banking, where its global reach has earned it the International Monetary Fund's label of being among the riskiest of all banks.
At the start of another turbulent day, Deutsche announced the sale of Abbey Life to insurance specialist Phoenix <PHNX.L>. The deal comes after the divestment of other non-core units such as its stake in Chinese lender Huaxia <600015.SS>.
Although the sale will result in a pre-tax loss of 800 million euros ($895 million), mainly from writedowns for Deutsche, it will lift the German lender's capital ratio by 10 basis points.
The lender's litany of legal troubles have spurred worries it may need to raise capital to staunch the damage.
Analysts at Goldman Sachs on Wednesday estimated that the U.S. mortgages case will cost Deutsche anything between $2.8 and 8.1 billion. Other analysts have said that any price tag above $5 billion will likely necessitate a capital increase.
Its overall legal provisions stood at 5.5 billion euros at the end of June. However, three other large legal headaches also remain, alleged manipulation of foreign exchange rates, an investigation into suspicious equities trades in Russia and allegations of money laundering.
(Additional reporting by Matthias Sobolewski, Jonathan Gould, Noor Zainab Hussain, Michelle Martin, Anjuli Davies and John O'Donnell; Editing by Keith Weir)