Workers have taken to the streets to support the pay demand

IG Metall wants a minimum 3% pay rise for its 3.4 million workers in the engineering and metalworking sectors.

But employers are reluctant to grant this, saying wage moderation in recent years has boosted competitiveness.

Last-ditch talks are being held in North-Rhine Westphalia to try and secure the basis for a national deal.

'Serious' situation

Unionised workers have already held a series of temporary "warning stoppages" at Daimler Chrysler, Porsche and Bosch factories in North-Rhine Westphalia, Germany's largest state.

Union leaders are threatening more widespread action unless what they regard as a satisfactory deal is hammered out in the next few days.

Real strikes would go against the trend of an improving outlook for the economy Reinhard Kudiss, chief economist at the BDI employers' federation

"I am concerned that some employers underestimate the seriousness of the situation," Juergen Peters, IG Metall's chief executive, told Die Welt newspaper.

"They should know that a wage conflict also gathers its own momentum."

Under German law, unions can only call a ballot on strike action if negotiations with employers have broken down.

Mr Peters said IG Metall may be compelled to take this course of action on Tuesday, although he stressed that it would only consider strike action as a last resort.

IG Metall has hinted that it is willing to reconsider its initial demand for a 5% wage rise but would not accept an increase of less than 3%.

German newspaper Westdeutsche Allgemeine Zeitung said employers were considering a basic 2% offer with a further 1% rise linked to productivity gains.

Inflation concern

Employers are worried that their international competitiveness will be eroded by too generous a settlement.

Germany's recent economic upturn has been driven by a growth in exports, something which economists attribute in part to pay restraint at many of the country's leading employers in recent years.

Employers' organisations said strike action would be extremely damaging for Germany's economy.

"Real strikes would go against the trend of an improving outlook for the economy," said Reinhard Kudiss, chief economist at the BDI federation.

The European Central Bank is watching the pay negotiations closely, amid concerns that rising energy costs are stoking inflation in Europe's largest economy.