Frankfurt - Germany's powerful IG Metall trade union reached a pay deal with employers on Wednesday, averting a potentially damaging nationwide strike in the engineering and electrical sectors.

Some 3.6 million workers will receive a two-stage increase totalling 4.2 per cent under the terms of the agreement reached after marathon talks lasting 23 hours.

The union staged a week of industrial action to lend force to its original demand of 8 per cent. It also threatened an all-out strike if employers did not budge from their original offer of 2.1 per cent.

"It's an agreement I can live with, but it does not make me euphoric," said IG Metall chairman Berthold Huber. "We wouldn't have achieved a significantly better result if we had gone on strike."

Stefan Roell, who led the employers association in the pay talks, did not rule out job cuts in an industry already feeling the pinch of the global economic slowdown.

The deal comes at a time when carmakers Daimler, Opel and BMW have announced temporary closures of factories to save costs, following a steep drop in orders.

Gloomy economic data released last week showed German industrial production at its lowest since the mid-90s and German factory orders recording their biggest slump since records began 17 years ago.

Under the terms of the deal, workers will receive a 2.1 per cent increase on February 1, 2009 and another 2.1 per cent hike three months later. In addition there will will be a one-off payment of 510 euros (637 dollars) for November and December 2008.

A provision was made for some companies to delay implementation of the second stage of the increase by up to seven months.

The union staged a week of token strikes from November 1 and threatened to ballot its members for an all-out stoppage from November 17 if the pay negotiations failed to achieve a result.

Wednesday's agreement applies only to workers in the south-west region of Germany, but is expected to be adopted by IG Metall members in other parts of the country. (dpa)