Daimler shocked investors on Thursday by being the first big European carmaker to issue a sharp profit warning for the full year, saying sluggish growth in the car market was taking its toll on earnings.

Shares in Daimler fell by almost 12 per cent after the German carmaker lowered its profit forecast by more than 10 per cent.

Dieter Zetsche, Daimler’s chief executive, said rising prices for raw materials such as steel and the strong euro were partly to blame. But he said a bigger reason was the drastic slowdown in European and US markets in the past few months.

He said after a sharp downturn in June, the situation had worsened in the past few weeks and in July even regions outside of its core markets had added to the slowdown.

Daimler said it expected to report ebit (earnings before interest and tax) of more than €7bn ($10.9bn) for 2008, excluding effects of the US subsidiary Chrysler it sold to buy-out group Cerberus last year.

Previously, the company had forecast profits would be significantly higher than last year’s €7.7bn.

Analysts were surprised since Daimler had been seen as one of the least likely car companies to issue a profit warning.

Jürgen Pieper, at Metzler, said he was disappointed, particularly after Daimler had reaffirmed its profit targets less than two months ago.

“A company of that size should not be the first to fall when a storm comes. But this has happened with Daimler before,” Mr Pieper said.

Other carmakers such as Volkswagen, Fiat and Peugeot had reaffirmed their full-year targets a day before, with VW being especially optimistic about weathering the storm.

Mr Zetsche admitted Daimler might have been too optimistic two months ago. “And it might also be that today we are too pessimistic,” he said.

His words came after Daimler reported slightly better than expected second- quarter results, with ebit falling by 4 per cent to €2.053bn, mainly triggered by lower earnings in the financial services division.

Revenues were up by 6 per cent and sales rose by 10 per cent to 566,500 units in the three months to June.

European carmakers are facing a rapidly-deteriorating economic environment, with car demand in the US and Europe plummeting in the first half of the year and the second half expected to be even worse. Mr Zetsche foresaw worldwide growth of car sales halving to about 2 per cent in the full year. Even so, he reiterated Daimler’s full-year target of increasing sales.

Like its rivals, Daimler is considering price rises.

“We will not be the latest to move forward on the pricing front,” Mr Zetsche said. In the US, Mercedes prices were increased some weeks ago.

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