Daimler saved by Middle Eastern wealth fund

A sovereign fund controlled by the oil-rich sheikhs of Abu Dhabi has become the biggest shareholder in Mercedes owner Daimler, guaranteeing its independence and future with a €1.95bn (£1.8bn) capital injection.

Aabar Investments, wholly owned by the emirate government and funded with oil money, will pay €20.27 per share for a 9% stake in the carmaker. The share issue will not be open to other shareholders - including long-standing investor Kuwait Investment Authority, the world's oldest sovereign fund, which has a 6.9% stake.

Daimler's flagship Mercedes brand is haemorrhaging sales, cash and profits. Having ended its disastrous 10-year marriage with Chrysler two years ago, the company has been consistently linked to a potential merger with German rival BMW.

Both premium carmakers have seen sales plunge by a quarter or more in the credit crunch as consumers shun luxury products. The news of the Middle East investment came as India's Tata launches the world's cheapest car, the "one lakh" or $2,000 Nano, after a six-month delay.

Dieter Zetsche, Daimler's chief executive, said the deal with Aabar Investments, announced late last night, would give the group extra flexibility to invest in new automotive technologies - such as electric vehicles and lighter compoound materials.

Mercedes models, despite the growing use of more fuel-efficient models, emit greater emissions of greenhouse gases than BMW. The rivals have teamed up with General Motors to develop new hybrid models linked to modern lithium-ion batteries but are substantially behind the curve compared with Japan's Toyota, Honda and Nissan.

European car firms are struggling to assert their future independence in the face of the worst downturn for more than 50 years. There are forecasts that only two or three of the current crop of 10 or so will survive. The French government has controversially bailed out Renault and Peugeot Citroen, while General Motors's German unit, Opel, is seeking a state-backed €3.3bn rescue plan which would see it and Britain's Vauxhall break away from the rest of GM.