"Yes, it's true we can expand the production line, but no decision has been taken on this matter," a company spokesman told Reuters when asked about the report.

Hungary's Economy Ministry said any further expansion plans by car manufacturers would be welcome but declined to comment further.

Daimler's plant in Kecskemet, a town about 100 kilometers southeast of Budapest, started commercial production of its Mercedes B class cars in March 2012.

Built at a cost of 800 million euros, the Daimler plant has been one of the biggest foreign investments made in Hungary in recent years and along with rival Audi's (VOWG_p.DE) engine and car assembly plant at Gyor has proved vital to Hungary's economy, which is heavily reliant on exports.

Daimler said in March that in addition to its B Class compact it would also start producing a new coupe, one of its CLA models, at the Hungarian plant from 2013.

Napi Gazdasag said trial production of this new four-door coupe has started at the Kecskemet plant.

The paper said the new capacity expansion could start next year, and would cost several tens of billions of forints. It said Daimler had already contacted the Hungarian government about the project.

Daimler faces tough competition from Volkswagen's (VOWG_p.DE) Audi unit and BMW (BMWG.DE) in its premium car business.

Both rivals earn not only higher profits per car but also sell more vehicles, thanks to making greater inroads into China, where Audi outsold Mercedes by a factor of nearly two to one in the first half of the year.

(Reporting by Krisztina Than/Hendrik Sackmann in Stuttgart; Editing by Greg Mahlich)

• A Permanent Economic Emergency