Mercedes-Benz is to build a new plant in Hungary and extend its Rastatt factory in Germany, widening its entry-level compact car line and targeting eastern European markets.

The automaker will spend EUR800m on the new factory in Kecskemét, about 50 miles (80km) from the outskirts of Budapest, creating about 2,500 new jobs.

"We are planning a new plant in Hungary to boost our competitiveness and to gain access to the potential of the eastern European markets," Daimler chairman Dieter Zetsche said in a statement.

"We will now invest some EUR600million in Rastatt for our new generation of compact cars," he added.

The production network between the two plants would contribute significantly to the company's efficiency and competitiveness, Daimler said.

"Rastatt is an important and proven part of our Mercedes-Benz production network; production of the next generation of premium compact cars will see the plant working at its full capacity," said M-B COO Rainer Schmückle.

"Both sites have to contribute to the cost-effectiveness of our involvement in this vehicle segment which is the subject of very intense competition," he added.

The company said four distinct new models are planned for its compact car segment and improvements in efficiency and structural design would ensure long-term profitability of the new vehicle generation.

"The successor generation will include product characteristics that are already popular with customers today - such as generous interior space and an elevated seating position. In addition, new vehicle variants will win additional target groups for the Mercedes-Benz brand," the automaker said.

It did not provide details but earlier media reports have said Mercedes, for cost reasons, would abandon the 'sandwich' floorpan construction of the current A- and B-class models, and engines would all come from existing line-ups.

There would be at least four variants of the new front-drive platform - a sporty three-door version, a compact SUV, a van and a five-door.

The new model is due out around 2012 and the new Hungary plant would produce at least 100,000 units, in addition to the 280,000 units built at Rastatt.

"Our expanded product range will allow us to tap into new customer groups and open up new market regions," said Zetsche.

Daimler did say on Wednesday there would be a high level of technical integration among the four new vehicles which would also benefit from the modular system used by other Mercedes passenger cars. The new generation of four-cylinder diesel engines being launched this year would be used in the new models.

Representatives of Daimler, Hungary and Kecskemét would sign a memorandum of understanding for the new plant in the coming weeks, Daimler said.