Chinese auto group BYD (Build Your Dreams) and German luxury car maker Daimler announced on Thursday a joint venture to mass produce an electric car in China.

A new research and development group to be called Shenzhen BYD Daimler New Technology Company will get an initial investment of around 600 million yuan (71 million euros, 87 million dollars), a Daimler statement said.

"We are well-placed with our new joint venture to make the most of China's enormous potential in electro-mobility," Daimler chairman Dieter Zetsche said.

Daimler is to bring "know-how in vehicle architecture and security" to the venture, while BYD will contribute "its competence in batteries and (propulsion) systems for electric vehicles," the statement added.

The world's oldest automaker and one of the youngest aim to market the vehicle under a new jointly-owned brand, joining forces to target China's fast expanding urban market.

Around 16 million autos are currently sold across the country each year.

Launched just seven years ago, BYD Auto now claims to be the sixth biggest car maker in China and its future plans are focused on electric or hybrid vehicles, building on the experience of its battery-making parent group.

The Chinese firm, in which US billionaire Warren Buffett holds a stake of 10 percent, has already begun to sell its electric E6 model as a taxi in the southern city of Shenzhen and aims to distribute the car in Europe in 2011.

The E6, of which around 100 have already been sold according to a BYD spokesman, benefits from Chinese state subsidies, one reason why analysts feel that country's market is poised for strong growth.

Daimler shares gained in midday trading on the news, which had been expected since the two sides had already signed a memorandum of understanding on the project.

Shares in the German automaker gained 3.70 percent to 39.65 euros, while the DAX index of leading German stocks was up by 2.37 percent overall.

Daimler, which made one of the first cars in the world in the 19th century, is the parent company of brands Mercedes and Smart.

It recently started testing electric-vehicle technology on the road in Berlin with a local power company and has also taken a stake in the US electric sports car specialist Tesla.

Some analysts are sceptical about the short-term prospects for electric cars however because of current limits on the range of purely battery-powered vehicles and their cost.

Others argue for their environmental advantages and Japan's Nissan Motor has made a major commitment to the technology with the launch of its Leaf auto.

- Dow Jones Newswires contributed to this story -