The Associated Press
Saturday, April 22, 2006; 6:54 AM

DUESSELDORF, Germany -- A German labor union and industry leaders reached an agreement early Saturday, a union leader said, heading off strikes among 3.4 million manufacturing workers in Europe's largest economy.

The breakthrough, which both sides called a success, came after all-night talks between the two sides in the key German state of North Rhine-Westphalia. Under the deal, the two sides agreed to a 3 percent raise covering the 10 months starting June 1, plus some one-time payments, negotiators for the IG Metall union said.

Union head Juergen Peters called the agreement "a well-judged compromise."

But some industry groups criticized the deal as far too taxing on Germany's small and mid-sized businesses, claiming they would be hard-pressed to make such significant increases.

"This was a clear victory for the union," Hannes Hesse, the head of the VDMA industry group, told the Tagesspiegel for its Sunday edition. He warned the increased costs could damage the competitiveness of smaller businesses and put jobs at risk.

The union had headed into the talks demanding a 5 percent raise for industrial workers, but dropped it to 3 percent. Employers had originally offered a 1.2 percent increase this year and next, plus variable one-time payments.

Under Germany's bargaining system, an agreement in one region sets the tone for the rest of the country and the agreement here was expected to be adopted in other regions.

Union and industry leaders in Bavaria and several other states said they would return to negotiations next week to try and adopt a deal based on that in North Rhine-Westphalia.

Talks broke down Wednesday between union and industry leaders in Bavaria and other states. Union leaders had threatened to hold a strike ballot on what would have been the German industry's first full-scale work stoppage in four years, unless there was progress in the North Rhine-Westphalia negotiations.