Thousands of staff took to the streets to protest at the job cuts

The firm had threatened to cut 6,000 jobs at a Mercedes plant in Sindelfingen as it looked to trim 500m euro (�332m; $612m) from running costs.

As part of the agreement, managers will take a 10% pay cut, while staff will work more hours and forego wage hikes.

Chancellor Gerhard Schroeder said the deal was a "victory for common sense".

Longer week

An agreement was reached after 16 hours of talks between management, the company's works council and the IG Metall union.

Many politicians and companies have called for Germany's labour laws to be relaxed, citing them as a main cause of economic problems.

On Friday, staff at travel company Thomas Cook also agreed to raise their weekly working hours for one year from August, with an option for a 12-month extension, according to reports.

Chancellor Schroeder said the compromise reached by DaimlerChrysler boded well for upcoming labour talks between trade unions and Volkswagen, Europe's biggest car producer.

He added that: "The achieved compromise will contribute to boosting the economic recovery".

Mercedes chief Juergen Hubbert said the deal "sets the course for increased productivity and efficiency".

He also said that Mercedes, the luxury car division of DaimlerChrysler, will make up the production lost as a result of the recent protests.

The company will now introduce a new 40-hour working week in "all development and planning departments" and break times will be reduced.

Also, an agreed 2.7% pay rise for workers from 2006 will no longer come into effect.

DaimlerChrysler shares climbed 1.1% in early trading in Frankfurt.

Tough times

DaimlerChrysler, which is suffering from falling sales and profits, had threatened to move the 6,000 jobs from Sindelfingen to South Africa and elsewhere in Germany, unless cost cuts were forthcoming.

Schrempp says the deal will lead to greater efficiency

The talks were "difficult" but have produced "the substantial outlines of an agreement", said Frank Stroh, negotiator for the IG Metall trade union.

DaimlerChrysler is beset by problems that have placed chief executive Jurgen Schrempp under fire from unhappy investors.

Profits fell 33% in the first quarter of 2004 as sales declined in all sectors of the market except commercial vehicles.

The company is grappling with the heavy cost of discounting in the US, as well as bearing some of the cost of massive losses at Mitsubishi in Japan, in which it holds a 37% stake.

Mitsubishi's problems have left its German partner's strategy for the key Asian market in tatters.

DaimlerChrysler has refused to pour more money into Japan's only unprofitable car maker.