The agreement trims average wages and benefits for UAW hourly workers to about $55 per hour this year, from more than $70 per hour when Ford was negotiating a watershed contract with the union two years ago.

That figure is expected to drop to about $50 per hour by 2011, or roughly on a par with what Japanese automakers led by Toyota Motor Corp will be paying their non-union US factory workers, Ford said.

Labor costs represent only about 10 per cent of the total cost of producing a vehicle in the United States, but Detroit automakers have faced increasing pressure to eliminate a wage and benefit gap with the US operations of their Japanese rivals, referred to in the industry as transplant automakers.

Ford's cross-town rivals General Motors Corp and Chrysler LLC are required to make wages and benefits paid to US factory workers competitive with Toyota and other Japanese automakers under the terms of their government bailouts.

Chrysler, about 80 per cent controlled by Cerberus Capital Management LP, and GM have received $17.4 billion of emergency government loans and have requested billions more in emergency loans to complete restructurings.

GM and Chrysler also have reached tentative agreements with the UAW on labor issues, but have withheld details until talks are completed on the funding of their healthcare trusts.

Wages and benefits in the GM UAW agreement are patterned on the Ford contract, but the contracts differ in other areas such as employee placement and company-specific details, UAW Vice President Cal Rapson said in a letter to members on Monday.

Ford's agreement with the UAW, which workers ratified earlier in March, suspends some performance and bonus payments, reduces overtime costs and cuts a paid holiday, as well as restructuring funding of a union retiree healthcare trust.

Joe Hinrichs, Ford's global head of manufacturing, said the savings from the operating agreement and restructuring of the funding of the trust, the Voluntary Employee Beneficiary Association (VEBA), are "critical to our future competitiveness."

"This gets us to within the ballpark of where the transplants are," Hinrichs said in a conference call with analysts and reporters.

The annual savings could exceed $500 million if industry conditions allowed Ford to exercise all of the changes in the agreement, Hinrichs said.

Ford has about 42,000 hourly workers covered by the contract. About half of the annual savings would come from the elimination of performance bonuses and the Christmas bonus and the suspension of cost of living increases.