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Daimler has announced that its long-awaited Eastern Europe plant for smaller Mercedes cars is to be at Kecskemét in Hungary. It will invest €800 million there and a further €600 million in expanding the plant at Rastatt in the Black Forest where compact cars are also made.

Mercedes-Benz plans to double to four the number of vehicles it has in the A- and B-class segments. The new vehicles will be based on the modular systems used for other Mercedes car classes and the plants at Rastatt and at Kecskemét will be closely aligned, Daimler said.

The announcement, by Dieter Zetsche, Daimler chairman and head of Mercedes-Benz Cars, ends speculation that the group might invest in Poland and Eastern Germany for a plant to serve East European markets.

Zetsche said: "Our expanded product range will allow us to tap into new customer groups and open up new market regions."

The investment at Rastatt, near Baden-Baden, will bring the plant up to full capacity. "Rastatt is an important and proven part of our Mercedes-Benz production network," said Rainer Schmückle, chief operating officer of Mercedes-Benz Cars.

The new plant at Kecskemét, 80km from Budapest, will create up to 2,500 jobs. Daimler intends to sign a memorandum of understanding with Hungarian officials and the city of Kecskemét in the next few weeks.

"The site meets all the high quantitative and qualitative requirements for the successful establishment of Mercedes-Benz production," Schmückle said.