Iranian public sector car giant Iran Khodro Diesel on Saturday signed a deal with DaimlerChrysler for limited numbers of luxury Mercedes-Benz cars to be assembled in the Islamic republic, the Daily Star website said, citing official news agency IRNA.

The report said that under the deal, IKD will set up a company called Top Khodro to assemble the cars under the supervision of Mercedes-Benz.

E-series 200, 250 and 350 models will begin rolling off the production line later in 2005, with initial annual production limited to 2,500 units, but eventually expanding to 5,000, the report added.

The head of IKD, Majid Sheikhani, reportedly said the cars would "fill the gap of luxury cars in Iran".

The official was quoted as saying that only imported components would be used, with the price of each car ranging from 650 million to 1.3 billion rials ($US73,000 to $146,000).

The Daily Star noted that IKD is Iran's top truck producer, and has a long history of producing Benz trucks and buses under license.

The signing of the contract, initially scheduled for May 2004, reportedly had been delayed - which the Iranian press attributed to the impact of US sanctions against the Islamic republic.

The report noted that Iran's car market is tightly protected, and foreign companies are confined to striking minority-stake joint-venture deals with local firms or allowing their cars to be assembled here from imported or locally made components.

Iran's domestic car, the Paykan, is to be taken out of production before next March, bringing to an end more than three decades of service. The Paykan is a descendent of the long-defunct British Hillman Hunter, designed in the mid-1960s, the production line for which was sold to Iran in 1967.

Observers reportedly said that despite attempts by hardliners in the government to thwart foreign investment through restrictions to protect national industry, demand for foreign cars has increased significantly in recent years.

The Daily Star said DaimlerChrysler enters Iran amid increased pressure from Washington on leading US enterprises, such as Halliburton and General Electric, to pull out of the Islamic republic.

Washington reportedly threatens penalties against companies working in Iran, which it accuses of bankrolling terrorism and seeking nuclear arms - Tehran denies the charges.

According to the report, for the first time in 10 years, Iran permitted car imports in the year to March 2005. But tariffs of 130% and red tape limited the number of imported cars to around a few hundred.

Tehran had counted on $620 million in tax revenues from the imports for the same period, which was not realised, the Daily Star said.

Iran reportedly has reduced the tariffs to 100% for the year to March 2006, in a bid to motivate big names including BMW and Toyota to export to the country.

The Daily Star noted Peugeot and Renault have both signed deals to make cars with Khodro and the Iranian automaker hopes more partnerships with foreign firms will allow it to grow big enough to meet rampant demand at home.

Iran Khodro manufactured more than 435,000 cars in the 11 months to February. The industrial group has around 30,000 employees in more than 100 affiliated companies, the Daily Star report said.

Iran's automotive industry - a developing opportunity

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