Berlin  - Germany is to inject government funding into engine-design work in the car industry, Chancellor Angela Merkel said in a newspaper interview published Sunday.

She spoke as the industry, a key German exporter, scales back production amid plunging worldwide sales.

"Germany invented the first cars a century ago. Now we are in a fresh competition to see if German industry can build the 21st century car," Merkel, who has a doctorate in physics, told the Bild am Sonntag newspaper.

She said German carmakers had to try harder to innovate.

"Germany had the unchallenged technical leadership in internal combustion engines which are still needed. But other technologies should not be neglected. Using research projects, we are going to give some extra impetus here to saving the climate."

She said moves last year to stimulate new-car sales by tax rebates would be followed this week by more moves to alter car taxes. The three parties in Merkel's coalition are scheduled to meet Monday to discuss an overall economic stimulus package.

Matthias Wissmann, chief executive of the automobile industry federation VDA, speaking to the weekly Auto Motor und Sport, said layoffs in the industry, which has already been shedding casual labour, were possible.

"We will do whatever we can to retain our staff who have employment contracts," he said. "But it's also plain that if we don't see light at the end of the tunnel after the first half of 2009, it will be difficult to keep up this approach."

Germany's auto industry employs 750,000, of whom 330,000 work for components manufacturers.

Wissmann said orders were currently 11 per cent lower than one year ago, the lowest level since the 1980s.

Wendelin Wiedeking, chief executive of sports car maker Porsche, said in a letter to employees which was quoted by the weekly Automobilwoche that output cuts and "decisive moves" to cut costs were coming up.

"We have a stony path ahead of us and we don't know how long it will be," he wrote. But he suggested sales of the company's sports cars and premium sports utility vehicles would "stabilize" in late summit. dpa