Three potential bidders are circling the ailing Landesbank WestLB amid continuing anxiety in the German banking sector sparked by the sub-prime mortgage crisis in the United States.

The American private equity group JC Flowers, run by the former Goldman Sachs banker Christopher Flowers, is vying with two German rivals for the regional government’s 38 per cent stake in WestLB.

Its German rivals are Landesbank Baden-Württemberg (LBBW), which recently agreed to swallow the sub-prime mortgage casualty SachsenLB, and the BayernLB, of Bavaria. So far the state of North Rhine Westphalia, which holds the 38 per cent stake, has explicitly confirmed talks with JC Flowers only.

“JC Flowers knows, and is known in, the German market,” a Düsseldorf-based banker.

Last month WestLB agreed to sell its shareholding in HSH Nordbank to institutional investors advised by JC Flowers. Since then WestLB has announced that it lost more than €600 million (£404 million) on proprietary trading losses and an inquiry is underway into the conduct of seven former managers.

German commentators seem convinced that LBBW is in pole position. “LBBW is as strong as a bear,” Ernst Pfister, the economics minister of Baden-Württemberg, said yesterday. “We are in the quarter-final of a contest that in the end will leave Germany with only two, perhaps only one, Landesbank.”

There is no mistaking, however, the anxiety underpinning the WestLB merger speculation amid signs of continuing stress in the German banking sector. IKB Deutsche Industriebank had to be bailed out after liquidity problems arising from the sub-prime crisis. Yesterday it forecast an expected net loss of between €600 million and €700 million. Its chief executive has stepped down.

Roland Tichy, editor of the weekly Wirtschaftswoche, has given warning that the credit crisis was only just beginning to surface in Germany.

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