Unions say the agreement will guarantee 1,000 jobs in Wolfsburg

VW had threatened to switch production of its Marrakesh model to Portugal unless it could reduce the cost of manufacturing in its home market.

It will now build it at its Wolfsburg plant after agreeing to cut production costs by 850 euros (�578) per vehicle.

Unions said the agreement would safeguard the jobs of 1,000 apprentices who will now work on the project.

Difficult path

VW said manufacturing costs in Portugal would have been at least 1,000 euros lower per vehicle than those under current labour agreements in Germany.

The main thing is that we can now produce and export the vehicle in Germany in competitive conditions Wolfgang Bernhard, Volkswagen

As a result of the new agreement, workers on the project will earn less than others at VW and could be required to work extra hours.

However, VW has also pledged to build a new model in Emden, another of its German plants, in 2008.

"For everyone involved, this was not an easy path," said Wolfgang Bernhard, chief executive of the VW brand.

"The main thing is that we can now produce and export the vehicle in Germany in competitive conditions."

VW is in the middle of a major cost-cutting drive and revealed plans to reduce its German workforce earlier this month.