The company has offered job guarantees in return for concessions

"A compromise has been found," said Waldemar Drosdziok of the IG Metall union. "Both sides emerge as winners."

The strike had initially been called over a wage dispute, though the resolution reached includes job guarantees until 2011.

In return, the unions accepted a 28-month pay freeze and a one-off payment.

It's a very important signal for the international business world that we're able to solve our problems without labour disputes Wolfgang Clement, German Economy Minister

"This round of pay talks was tough as nails. I think it was an honest compromise," said IG Metall chief negotiator Hartmut Meine.

"We were able to reach a fair balance between the aim of securing jobs on one side and the company's interest in reducing costs," he said.

Compromise

Under the terms of the agreement, VW workers will get a one-off payment of 1,000 euros each in March in return for freezing their pay until the end of January 2007, and have a pledge of job security until 2011.

VW had sought a two-year pay freeze and a 30% cut in labour costs by 2011. IG Metall had been seeking a pay rise of up to 4%.

The German Government welcomed news of the deal.

"It's... a very important signal for the international business world that we're able to solve our problems without labour disputes, unlike in many other countries," said Economy Minister Wolfgang Clement.

But investors were less impressed, fearing that the job guarantee would make it more difficult for Volkswagen to reduce its labour costs.

Volkswagen's shares were down 3.2% at 35 euros in afternoon trade.