Chancellor Gerhard Schroeder, under pressure to reverse a rise in unemployment to post-war highs, has proposed a cut in corporate taxes as part of a package of new measures to boost Germany's sluggish economy.
But reaction to the reforms was mixed, with some analysts questioning plans to pay for the tax cuts with higher levies on dividends. Others expressed doubts about whether the steps would do much to ease Germany's acute unemployment.
Mr Schroeder predicted unemployment would begin to fall by the end of this year.
With polls showing support for his Social Democrats on the decline, Mr Schroeder urged expanding a loan programme for small businesses, investing two billion euros in transport and reforming Germany's cumbersome federal structure.
The measures, presented in a feisty speech to Parliament, were widely seen as an attempt by Mr Schroeder to regain momentum ahead of an election in the large industrial state of North Rhine-Westphalia on May 22.
Mr Schroeder described the steps, which require approval by the conservative opposition, as an extension of the "Agenda 2010" reform programme he unveiled two years ago.
"We need to do something in the short term," Mr Schroeder said to sporadic applause from his supporters in the Bundestag.
"This packet of measures is wise and desirable given the huge risks posed by international crises and external economic factors."
Mr Schroeder told German television he wanted the measures implemented quickly, before the election due in late 2006.
"We'll definitely do it before the next election," he said. "It'll move forward quickly. We will see unemployment lower this year, but I don't want to be specific about any numbers."
Angela Merkel, leader of the rival Christian Democrats (CDU), welcomed the proposal by Schroeder to cut the base corporate tax rate to 19 per cent from 25 per cent. But she said it fell short of a "complete concept" for tax reform.
"It's not the accord for Germany we wanted," she told German television. "But the SPD-Greens government is not able to resolve the problems Germany is facing."
Mr Schroeder had spent two hours meeting opposition leaders Merkel and Christian Social Union chairman Edmund Stoiber in the chancellery. He said they agreed to support many of his plans but rejected others, such as cutting homeowner subsidies.
Mr Stoiber told a separate briefing: "It was certainly a worthwhile meeting. But unfortunately there was no agreement on increasing job market flexibility. Without that it will not be possible to significantly reduce unemployment."
Economists said Mr Schroeder's speech sent a positive signal but contained no miracle solutions for unemployment.
The number out of work rose to 5.2 million last month, the worst figures of the post-World War II period. A growing numbers of German firms are shifting investments to low-cost eastern Europe nations.
"The corporate tax reform is good, but I don't expect it will have any impact on jobs," said Hans-Werner Sinn, head of Germany's respected Ifo economic research institute.
Anton Boerner, president of the BGA foreign trade and wholesalers association, was blunt: "The chancellor is making a mistake if he thinks what he announced today is sufficient."
Mr Schroeder's Social Democrats have ruled North Rhine-Westphalia for nearly 39 years, but polls show their impressive run may be about to end, a result which could damage Mr Schroeder's hopes of winning a third term in 2006.
The rise in joblessness, partly due to statistical changes over unpopular benefit cuts, is casting a cloud over an economic recovery already threatened by oil prices and a strong euro.
Economists expect the German economy to grow by only 1.0 per cent this year after a 1.6 per cent expansion in 2004. Companies like carmaker Opel and retailer Karstadt have announced plans to slash thousands of jobs.
At the heart of the new measures are moves to ease the burden on German companies - a decision welcomed by economists, the opposition and the European Commission in Brussels.
When the base rate and local business taxes are taken into account, German firms pay taxes of around 38 per cent - the highest in Europe.
The cuts will be offset by closing tax loopholes and, in a move likely to alienate some investors, by raising taxes on dividends. Sources said Mr Schroeder planned to raise the amount of dividend income subject to taxes to 60 per cent from 50 per cent.
"They seem to be giving with one hand and taking with the other," said Andrew Clare, economic consultant to Legal & General Investment Management.
"Firms will have higher post-tax profits because the tax rate has gone down, but then when they come to distribute this the poor old investor gets to pay the additional tax."