Volkswagen, Europe's largest carmaker, has become the latest German firm to try to take on unions as it seeks to make major cost cuts.

With profits under pressure, the firm has proposed a two-year pay freeze, while declining to guarantee jobs.

The IG Metall union, Germany's second largest, has said it wants a 4% wage rise and extensive job protection.

Having already made concessions to DaimlerChrysler and Siemens, unions may not back down this time, analysts say.

Talks are scheduled between Volkswagen and IG Metall for the middle of September and will be closely watched to see how willing the unions are to accept change.

Many politicians and companies have called for Germany's labour laws to be relaxed, citing them as a major cause of the country's economic problems.

Volkswagen used a press conference on Monday to make its stance crystal clear.

"There is no room for a wage increase," says Peter Hartz, Volkswagen's head of personnel.

Hartz has played a prominent part in helping draft a programme of national labour reforms that have won the backing of Chancellor Gerhard Schroeder's government.

Volkswagen also wants a 30% reduction in labour costs by 2008. The company maintains that employees are paid more than their peers at rival's plants.

It recently said that 2004 profit will fall short of company forecasts, citing the strength of the euro against the dollar, a drop in demand, increased competition and high production costs as problems.

Rival DaimlerChrysler last month struck a deal with trade unions, but only after its plans had prompted walkouts and protests.

Under the agreement, managers will take a 10% pay cut, while staff will work more hours and forego wage hikes.

Chancellor Schroeder said it was a "victory for common sense", adding that he hoped it boded well for the Volkswagen negotiations.

Source: bbc.co.uk