DaimlerChrysler yesterday announced sharp production cuts in north America, reflecting the brutal market conditions that have left deep scars on the United States auto industry.

The company said its Chrysler division would reduce shipments to dealers by 135,000 vehicles in the second half, nearly 16% lower than previous plans, in an effort to reduce inventories bloated by falling sales. The decision to pare back production came four days after the company warned that Chrysler would lose $1.5bn (£800m) in the third quarter, more than twice previous forecasts.

Chrysler had managed to eke out a profit in 2005 while its big American rivals had lost billions of dollars.

In a presentation from the company's German headquarters in Stuttgart, chief executive Dieter Zetsche said the carmaker "had to finally bite the bullet," after disappointing sales in July and August. "We realised that our dealer inventories were increasing and were at pretty unhealthy levels," he said. "It goes without saying that I myself am more than dissatisfied with the situation."

Chrysler plans to deliver 705,000 vehicles in the second half, down from a projected 840,000. The company said it was examining "structural costs", presaging more tough times ahead for the American auto workforce. The company said it would also work to address its "noncompetitive health care" benefits for workers.

The American car industry has had a wretched time over the past five years: losing market share to more nimble Asian competitors; struggling with high labour and health care costs; facing rising raw material and petrol prices and unable to ween customers off incentives introduced after the terrorist attacks of 2001.

Detroit rival Ford last week said it could lose as much as $9bn this year as it undergoes further upheavals to arrest its declining market share. Bill Ford Jr, great grandson of founder Henry Ford, recently stood down as chief executive after failing to turn the company's fortunes around.

Chrysler partly blamed its woes on the consumer shift away from gas-guzzling SUVs, minivans and pickups as the price of petrol has risen. Sales of SUVs alone have fallen 9% in the market over the past year. More than 70% of Chrysler's north American sales are from the larger vehicles and the company said it would work to rebalance its product mix.

Mr Zetsche said the dynamics of the US market had shifted in favour of the Japanese carmakers, which are stronger in smaller passenger cars and have a good reputation for quality.

The company said its US sales were down by 8% in the first eight months of 2006, compared to an industry-wide sales decline of 4%. It now expects its share of the north American market to be 11.7% in the second half, down from previous projections of 12.6%. Still Chrysler remained optimistic about next year, suggesting that new product launches and lower inventories would increase sales again in 2007.

DaimlerChrysler is cutting 8,500 factory jobs at its Mercedes division.