German carmaker DaimlerChrysler's chief executive Juergen Schrempp admitted major problems at its Mercedes division at the company's annual meeting Wednesday.

Facing sharp criticism from shareholders for the falling profits,Schrempp admitted the problems with its Mercedes car and the Smart compact car would hurt 2005 earnings.

The Smart car business, part of the Mercedes division, were "totally unacceptable" and the revamping efforts would cost up to 1.2 billion euros (1.56 billion US dollars), Schrempp told some 8000 shareholders.

So far as Mercedes business concerned, Schrempp said the problems had to be dealt with comprehensively and as quickly as possible.

Mercedes-Benz's earnings slumped by 97 percent to 20 million euros in the fourth quarter of 2004.

Last week, DaimlerChrysler announced it was recalling 1.3 million Mercedes cars worldwide due to electrical and braking-system defects, the biggest ever in the company's history.

However, he promised some 8000 shareholders that the company's earnings will go on the rise in 2006.

DaimlerChrysler shares have lost about a third of their value over the past five years.