Daimler's Smart car has failed to make money since its launch

Despite a 16% rise in Mercedes-Benz car sales, the division saw an operating loss of 678m euros due to the costs of revamping its loss-making Smart brand.

The news sent Daimler shares tumbling by 4% during Thursday trading.

Daimler is in the process of cutting 15,000 jobs in a bid to reduce costs and improve competitiveness.

Recovery signs

Away from the restructuring costs at its smart division, there are signs that Daimler chief executive Dieter Zetsche's reorganisation is having an effect.

The whole group sold 1.15 million cars worldwide between January and March, up 6% on the same period in 2005, and total revenues rose by 17% to 37.2bn euros.

But in the US a price war in the tough North American market hammered profits at its Chrysler division, which was more than halved despite a 4% increase in vehicle sales.