Investors panicked that government patience for bailouts had run dry and Deutsche Bank's share price closed down 7.5 per cent at €10.55, its lowest level since the 1980s and 50 per cent lower compared with a year ago.
Even though a spokesperson for Merkel later said there was no reason for the speculation and a spokesperson for the bank said a capital boost was "not on the agenda", investors could not be calmed and shares continued to tumble throughout the day.
The reports came barely a week after it was revealed the bank was fighting a record $14bn (£10.8bn) fine from the US Department of Justice for mis-selling mortgage-backed securities.
The fear soon spread to the rest of the banking sector, with the Euro STOXX Europe 600 Banking index closing down 2.3 per cent, as many likely wondered if politicians were really prepared to leave banks dubbed too-big-to-fail banks to fend for themselves.
"No doubt the German government will feel they have done enough bailing out in recent years," said Joshua Mahony, market analyst at IG. "Yet when we are talking about a bank which is largely perceived as ‘too big to fail’, what Merkel has done is less 'whatever it takes' and more 'on your own'."
Deutsche is far from the only big bank to have red flags raised about its capital buffers. July's European Banking Authority stress tests, which had no official pass mark, showed Deutsche Bank's transitional tier one capital ratio could be weakened to 7.8 per cent by 2018 in the event of a sharp economic downturn.
However, fellow German bank Commerzbank's capital position weakened to 7.4 per cent in the adverse test scenario, while the UK's Barclays dropped to 7.3 per cent and Allied Irish Banks fell to 7.4 per cent.
Italy's Monte dei Paschi di Siena's capital position plummeted to minus 2.2 per cent in the stress tests. A rescue deal is currently in the process of being ironed out for the bank, and a wider bailout for Italian banks has been discussed.