State newspapers said 13 major automobile makers -- including the China joint ventures of Volkswagen AG and General Motors Corp -- had agreed to price 25 models above a state-set limit.

The floor prices would be set by the State Economic and Trade Commission twice a year according to production costs and market demand, and carmakers who undersold could have their operations halted, the newspapers said.

An official of Shanghai Automotive Industry Corp (SAIC), which makes China's best-selling Santana 2000 sedan in cooperation with Volkswagen, hailed the agreement but promised steady prices only until the end of the year.

"We welcome this action," said the official of SAIC's sales department, who declined to be identified. "It means fair competition."

"We definitely will not touchprices this year, but next year remains to be seen," he told Reuters. "We have room to adjust prices further, but from a long term perspective, everyone wants to maintain the market's stability."

China's smaller car makers said they would be watching heavyweights such as SAIC before making their pricing decisions.

SAIC sparked the latest round of cuts in a heated two-year price battle when it slashed the price of its Santana 2000 sedan to 110,000 yuan from 160,000 yuan late last year, industry analysts have said.

A spokesman for Chongqing Changan Automobile Co Ltd, which signed the price agreement, said the pact was sure to boost the sedan sector, although the company would be keeping an eye on its rivals.

"In the short term, price adjustments probably will not be possible," said spokesman Yan Changyun.

"But we have to watch market demand and the actions of our competitors," he said, adding that larger firms still had the capacity to make additional cuts.

"We are not in favour of cutting prices onour own because it disrupts the entire market," Yan added.

Changan produces one of China's most popular mini-sedans, the Alto, in a joint venture with Japan's Suzuki Motor Corp, and has A shares for domestic investors and B shares for foreign investors traded in Shenzhen.

Most of China's carmakers would find the price floor in their interest as they struggle to make a profit amid sharp competition, said Coco Kee, director of China operations for US marketing research firm Automotive Resources Asia.

"Most companies don't have the profit margin to cut their price further, so if the price war goes on, the manufacturers and the suppliers will suffer together," she said.

Even SAIC found price cuts only caused consumers to hold back their purchases and wait for further reductions, Kee said.

"I think they have learned some lessons from the market -- cutting prices isn't the way to stimulate demand."

Passenger cars are among the latest of several industries where Beijing is moving to stamp out price wars.Other sectors include steel, machinery, colour televisions, beer, laundry detergent and sugar.

Overheated competition is largely due to a rapid build-up in manufacturing capacity from an early 1990s investment spree.