(Releads, updates with Daimler, government comment, detail)
BUDAPEST, Oct 27 (Reuters) - Daimler (DAIGn.DE) will go ahead with an 800 million euro ($995.4 million) investment to build a manufacturing plant in Hungary, despite the global financial crisis, the German carmaker said on Monday.
The announcement follows newspaper reports that Daimler, the world's second-biggest luxury car maker, was halting production at its main factory in Germany for five weeks due to a drop in demand.
Daimler shares were down 12.2 percent at 19.68 euros at 1024 GMT, as the wider market .FTEU3 fell 5 percent.
Last week Daimler lowered its full-year revenue and profit forecast after third-quarter operating profit plunged by two thirds.
The German carmaker and the Hungarian government signed an agreement on Monday for the investment plan, first announced in June, which will build capacity for producing 100,000 compact cars a year.
"The basis for the decision to invest here is still in place, we stand by that decision, the last six weeks didn't change our forecasts," Mercedes Chief Operating Officer Rainer Schmueckle told a joint news conference with Prime Minister Ferenc Gyurcsany.
"Our forecasts for compact car market growth remain in place and out Rastatt site can't meet demand for this growth," Schmueckle said.
Hungary has been one of the hardest hit countries among European Union members in the recent financial crisis as investors are concerned about its high debt level, heavy reliance on external financing and the proliferation of foreign currency denominated loans among households.
Daimler's new plant, to be built in Kecskemet, about 80 kilometres southeast of Budapest, will employ 2,500 workers.
"I don't want to make it a secret that when news of global economic turbulence started coming in, I had some doubts about the decisions my colleagues and I have made (about this investment)," Gyurcsany said.
"But never for one minute was Mercedes-Benz in doubt about its investment here," Gyurcsany added.
On Sunday, Germany's Frankfurter Allgemeine Sonntagszeitung said the carmaker had imposed a five-week Christmas break for its 36,000 workers at Sindelfingen in Germany from Dec. 11, instead of the normal two to three weeks. Daimler was not immediately available to comment on the report.
Reporting by Balazs Koranyi; Editing by Erica Billingham