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In this Dec. 3, 2009 file picture the Mercedes-Benz star is photographed on the Mercedes-Benz production site in Sindelfingen, Germany.

Thomas Kienzle/AP

Daimler AG warned that profits at its Mercedes-Benz car unit would not reach the level of last year due to "deteriorating" market conditions in Europe and competition in the Chinese market intensifying.

Dieter Zetsche, chief executive of the German car and truck maker, told reporters in Stuttgart that the car unit's profits would therefore decline in the second half of the year, compared with the first half.

Mercedes-Benz cars made a €2.57-billion ($3.33-billion U.S.) operating profit in the first six months of the year. The car maker forecast in July that full-year operating profit would be "in the magnitude" of last year's €5.19-billion. Mr Zetsche did not comment on Thursday on the outlook for profits at the group level.

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Daimler shares fell 3 per cent to €38.84, dragging rival BMW 2.7 per cent lower to €59.53.

Max Warburton at Bernstein Research, said: "Daimler's warning . . . is not just a blow for Daimler, but is relevant for the whole sector. Other German car makers are set to disappoint too . . . China profitability is falling and it is going to affect the earnings of all these companies."

Daimler has fallen behind premium rivals BMW and Volkswagen-owned Audi in unit sales and has raised investments this year in order to catch up. This is set to weigh on profits in the short term, however.

Mercedes-Benz recently launched a revamped A-Class, a sporty compact, in order to compete with BMW's 1-Series and the Audi A3; this is only one of several new models due in the coming months.

Mr. Zetsche has repeatedly warned that 2012 would be a "year of transition" and he conceded in July that achieving full-year targets would be a "challenge" as economic uncertainty might increase in the latter half of the year.

He indicated on Thursday, however, that the already very difficult market conditions in Europe have deteriorated further.

"There is also significantly sharpening competition in China," he added, in a possible reference to growing pricing pressure there.

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Analysts say the uncertain outlook for the Chinese car market is one of the key factors weighing on German car stocks.

Daimler's Chinese sales increased only 6 per cent in the first eight months of the year, due in part to problems with the company's sales organization. Rivals Audi and BMW recorded double-digit percentage gains during that period.

Daimler said in July that it had continued to experience pricing pressure in China in the second quarter but that pricing had improved from the first quarter when it launched various sales incentives.

In contrast, Daimler's truck unit continues to outstrip its rivals, having grown strongly in the US, Russia and Japan this year.

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