Sales of Mercedes-Benz cars could fall 50% in Brazil because of recent tax increase on imported cars, according to the Brasil Economico newspaper.

Mercedes was selling 1,500 cars a month in Brazil and had been on track for record sales of 10,000 cars this year, but this could slow dramatically after the government raised tax on cars by 30 percentage points.

It also announced tax breaks for cars manufactured domestically seeking to protect the local industry from a surge in imports largely spurred by the strength of the Brazilian real against the dollar.

While the measures have been welcomed by local manufacturers, they will impact importers which have risen to 20% of the total Brazilian car market from 10% five years ago.

Brasil Economico cited Mercedes' president for Latin America, Juergen Ziegler as saying the brand has a stock of 900 cars left to sell in Brazil that won't be hit by the higher tax rate.

Mercedes had been planning to build a factory in Brazil, but may instead turn to Mexico for the investment, Ziegler said.

Mexico is not subject to the same taxes, and a trade deal with Brazil would allow the German company to access the Brazilian market without having to pay the new taxes.