The firm's US arm has been performing badly

The German-US firm will pay 5.5bn euros ($7.41bn; �3.7bn) to buy 80.1% - much less than the $36bn paid for Chrysler's 1998 merger with Daimler-Benz.

DaimlerChrysler shares closed up 1.8% on the German market.

The car maker will keep a 19.9% stake in Chrysler, which will foot pension and healthcare costs.

'Right conditions'

The deal was sealed after two months of talks between an array of potential bidders interested in buying the US operation.

It marks the reversal of a landmark deal in the automotive industry.

We have created the right conditions for a new start for Chrysler and Daimler Dieter Zetsche, chief executive DaimlerChrysler

The future of Chrysler has been in the balance recently as it battled against huge losses that hit $1.5bn last year.

"With this transaction, we have created the right conditions for a new start for Chrysler and Daimler," said DaimlerChrysler chairman and chief executive Dieter Zetsche.

The acquisition comes nearly a decade after the $36bn merger of the company behind the Jeep and Dodge brands and the former DaimlerBenz AG.

Along with other US car firms, Chrysler has suffered from falling profits and increased competition from Japanese car firms - slumping to fourth place in the US light vehicle market behind Toyota.

Like its US peers, the group has also embarked on a significant reorganisation plan, which includes 13,000 job cuts.

Tom LaSorda, president and chief executive of Chrysler Group, said the transaction would create a "standalone Chrysler that is financially stronger".

Worker worries

Founded in 1992, Cerberus specialises in snapping up ailing firms and reviving them by means of heavy cost-cutting.

It currently owns about 50 companies with combined revenues of more than $60bn.

Unions - who had been worried over job implications of any sale - welcomed the deal.

Ron Gettelfinger, president of the United Autoworkers, said: "The transaction with Cerberus is in the best interests of our UAW members, the Chrysler Group and Daimler."

The UAW has a four-year contract with Chrysler that comes to and end in September.

The transaction with Cerberus is in the best interests of our UAW members, the Chrysler Group and Daimler Ron Gettelfinger, president, United Autoworkers

Analysts have said that making the firm profitable will demand that any new contract with the UAW includes lower costs, notably in health care.

Experts also said the deal illustrates the continued interest of Cerberus in the auto industry.

In 2006, GM offloaded a majority share in its finance arm, General Motors Acceptance (GMAC), for some $14bn to a group that was headed by Cerberus.

Analysts believe the private equity firm - which has been headed by former US Treasury Secretary John Snow since last October - might be considering merging the GMAC outfit with Chrysler Financial.