(Adds Steinbrueck comments on debt and inflation)
BERLIN, April 21 (Reuters) - The German government will predict a much bigger contraction in gross domestic product this year than the 2.25 percent decline previously seen when it unveils new forecasts next week, Finance Minister Peer Steinbrueck said on Tuesday.
At an event held by the Karl Schiller foundation in Berlin, Steinbrueck said the government's new forecast for 2009 would be "significantly worse" than the 2.25 percent contraction in Germany's GDP the government had previously predicted.
A newspaper said on Monday the government aimed to lower its forecast to a contraction of 5 percent for this year, reflecting the severity of the recession.
Europe's largest economy has never shrunk by more than 1 percent in a calendar year since World War Two. Some economists have said GDP could shrink by up to 7 percent in 2009.
Steinbrueck also reiterated his concern that government efforts to stimulate global demand via increased borrowing could test the ability of markets to absorb new debt.
"This doesn't just apply to corporate bonds, but also issuance by states which don't have such good credit ratings as Germany," he said. "What happens if markets are overstretched?"
With global interest rates low and states pumping money into the world economy, there was a risk of inflation picking up again, meaning that excess liquidity would have to be taken from the market in the future, he added.
"The question is: How do I get the toothpaste back into the tube?" Steinbrueck said, noting it would be hard for a global economy recovering slowly to cope with rising interest rates. (Reporting by Matthias Sobolewski, writing by Dave Graham; editing by Leslie Adler)