BERLIN (AFP) - The collapse of the vast German retail group Arcandor, threatening 43,000 jobs, erupted into a bitter fight on Wednesday 10 June as politicians gear up for a national election in less than four months.

German Foreign Minister Frank-Walter Steinmeier - Photo: Attila Kisbenedek/AFP

The centre-left Social Democrats (SPD), who hope to unseat Chancellor Angela Merkel in elections in September, attacked a rising star Economy Minister Karl-Theodor zu Guttenberg who is a key Merkel ally.

They accused zu Guttenberg of stabbing labour in the back for opposing Arcandor's request for emergency state aid as well as for arguing two weeks ago against a rescue for GM subsidiary Opel with billions of euros of state aid.

"In a government, we must all pull together," said Frank-Walter Steinmeier, the SPD's candidate for chancellor as well as foreign minister and vice-chancellor under Merkel in Germany's unwieldy grand coalition government.

"It cannot be the case that we have a labour minister who fights for people's jobs and a economy minister who fights for insolvencies," Steinmeier told mass circulation daily Bild.

Wolfgang Tiefensee, also from the SPD, the junior partner in the ruling coalition, said zu Guttenberg's actions were "unacceptable."

Tiefensee told NDR info radio: "I expect from an economy minister that he tries to ensure that employees keep their jobs."

But zu Guttenberg hit back, telling Bild in an interview: "If the owners and creditors are not prepared to take the risks, then we cannot burden the taxpayers with them."

"In addition, bankruptcy now is not the end, but it can be used as a springboard for a successful new beginning," he added.

Both Merkel and zu Guttenberg have justified the refusal to bail out Arcandor by saying that it was a very different case from that of Opel.

To tap into a special "Germany Fund" established to help firms in difficulty due to the financial crisis, companies must prove they were solid before the recession hit.

Berlin said that Arcandor was struggling before the downturn whereas Opel had been hit with the double-whammy of the credit crunch and a collapse of the auto industry.

"We must think about the taxpayers," Merkel told reporters on Tuesday 9 June.

The SPD is still reeling from an electoral debacle on Sunday 7 June when it plummeted to an record low level of 20.8 percent in European elections, compared to 37.9 percent for Merkel's centre-right parties.

Some have attributed the slump in support to the SPD's perceived willingness to throw taxpayers' money at companies in difficulty regardless of their circumstances.

In contrast, according to a new Forsa poll for Stern magazine, zu Guttenberg's "firm hand" policy toward state bailouts has raised his standing among voters.

The survey of 1,000 voters showed that 37 percent believe zu Guttenberg's reputation has grown in the past few days with only 10 percent thinking the reverse.

Forty-four percent saw no change with nine percent saying they did not know.

As Germany heads further into what is expected to be the worst recession for six decades, the debate over bailing out firms with government money is likely to play a central role as the election campaign hots up.

Figures released earlier on Wednesday 10 June showed that bankruptcies in the country had risen by 10 percent in the first three months of this year compared to the same period in 2008.

But if Wednesday 10 June's editorials are to be believed, Merkel gamble of letting Arcandor fail seems to have paid off.

"The people have had enough of billions in aid for companies," said the Main-Post daily.