Funds advised by U.S. private equity group J.C. Flowers & Co LLC have taken legal action seeking to prevent the full nationalisation of German bank Hypo Real Estate (HRXG.DE), the investment group said.

As widely expected, the funds filed a lawsuit in a Munich court last week in a bid to invalidate a squeeze-out of minority shareholders at HRE, Flowers said in a statement.

The squeeze-out for 1.30 euros in cash per share was decided at a shareholder meeting on Oct. 5 when the German state used its majority stake to force through the formal vote with an approval rate of 94.7 percent.

Berlin's actions represent a violation of constitutionally protected ownership rights and result in the expropriation of shareholders, Flowers said in a statement dated Oct. 11.

J.C. Flowers has also filed a formal complaint with the European Union, it said.

HRE declined to comment on the suit, which follows similar legal action from the SdK shareholders association and hedge fund Exchange Investor.

HRE shares edged up 0.7 percent to 1.45 euros by 1205 GMT.

The squeeze-out has given Berlin a free hand to restructure HRE, which became one of Germany's highest profile casualties of the credit crisis requiring around 100 billion euros ($146 billion) in mainly state guarantees to stay alive.

Flowers put more than 1 billion euros into former blue-chip HRE in 2008 and lost almost all of it.

Taking complete control of HRE will give German bank rescue fund Soffin the legal certainty and flexibility it needs for further restructuring before it pumps any more cash into the bank, HRE Chief Executive Axel Wieandt has said.

HRE was a big player in Germany's Pfandbrief covered bond market, which is a vital and stable source of refinancing to the country's banks, making it too important to go bust.

Its business model, which relied on wholesale funding to finance infrastructure projects and public-sector budgets, ran into trouble when interbank lending dried up in the credit crisis, prompting the state rescue.

The bank's capital needs are still significant. Wieandt estimated last week it needed 7 billion euros more to account for past and expected losses, on top of the 3 billion euros that was already agreed this year.