The German construction giant Holzmann yesterday withdrew its filing for insolvency after the Chancellor, Mr Gerhard Schroder, persuaded the company's creditor banks to agree a 4.3 billion deutschmark (€2.2 billion) rescue package. But the European Commission was last night waiting for clarification of the terms of the deal to ensure it did not conflict with EU regulations on state subsidy of industry.

Under the terms of the rescue package, the Berlin government will top up the banks' emergency loans with DM250 million out of public funds. EU rules demand that such rescue aid must first be approved by the Commission and that state assistance can take the form only of guarantees or short-term loans.

Mr Schroder yesterday dismissed fears that Brussels might block the bail-out, which will save the jobs of almost all Holzmann's 17,000 employees and those of more than 50,000 people who work for the firm's suppliers.

"I believe the sum being contributed from the government's side for the Holzmann rescue is within the EU's legal framework," he said.

The Chancellor's intervention came after two rounds of negotiations failed to produce agreement among the banks on a rescue. Addressing thousands of cheering Holzmann workers outside the talks venue in Frankfurt after the deal was struck, Mr Schroder declared that he had shown the banks the limits of what they could do in the name of business.

"The banks have accepted their responsibility towards society and the economy as a whole. We'll make sure it stays that way," he said.

After months of plummeting opinion poll ratings, the Chancellor must have relished his moment of glory on Wednesday as the Holzmann workers chanted "Gerhard! Gerhard!"

But the government's rush to rescue a firm brought low by management incompetence has raised doubts about the Chancellor's commitment to the free market, fuelled by his shrill protest against Vodafone's hostile bid for Mannesmann.