National Franchised Dealers Association director Alan Pulham believes Mercedes-Benz's price cuts "could be the first major brick in the prices wall which is coming down".

He said the decision by Mercedes to move its entry price below £13,000 was significant. It priced the A-class in competition with Vauxhall Astra and Peugeot 306.

"Mercedes no longer operates only in the premium market - even BMW is semi-volume," said Mr Pulham.

The Mercedes announcement is the latest in a flurry of moves influencing the UK motor retail market. They include a succession of new entrants which are basing their bid for a share of the market on price cuts.

These include Amazon, the world's largest online retailer with 23 million regular shoppers, which has bought a 5% stake in Greenlight.com, a US online firm.

In the UK, Sainsbury's is the first supermarket giant to show a major interest in car selling.

Its Bank Drive finance package on a choice of 3,500 derivatives is available through all 432 store branches. Mr Pulham said the worrying aspect of the Sainsbury's initiative was that so many companies wanted to get into motor finance.

"A high percentage of retail buyers have their finance sorted when they enter a showroom," he said. "Neither dealers nor manufacturers are getting their share of this profit centre."

Tod Evans, Peugeot Motor Company managing director, said the Sainsbury's move should be kept in perspective. "It is not entering into car retailing and cannot offer demonstrators," said Mr Evans. "Sainsbury's cannot offer part-exchange facilities, conventional finance, nor outright purchase.

"Its PCP package is no better than that offered by most finance houses."