However, BMW says the location of the plant - where the new Rover 200/400 models are to be built - will not be decided for another four to five months.

The relocation is part of an effort to boost lagging productivity at Rover, where reported losses of DM500m or more have sparked turmoil between unions and management in recent months at the Longbridge plant in Birmingham.

BMW said the radical cost-saving and workplace flexibility agreement struck with Rover employees would help lift the British carmaker's productivity and help to make the new investment viable.

Rover has been hurt by the strength of the pound but BMW said the new unit should still make a profit.

BMW has spent about £1.1bn (DM3bn) on Rover through the end of 1997 including a DM 2.1bn mark purchase price and DM 900m in losses.

Merger denied

BMW has also denied that it is in merger talks with any potential partner.

"Neither the BMW group nor its majority shareholder (the Quandt family) is in talks with anyone," said a BMW spokesman at a news conference in Munich.

"There are no plans for a merger or any sort of cooperation that goes beyond a normal technical cooperation," he added.

Rumours or tie-ups surrounding Ford, Swedish carmaker Volvo and BMW have aired in recent weeks.

Shares in BMW jumped on the news, rising 36 pfennigs or 2.97% to DM1,245.00.