"We have made an important breakthrough on this subject where initially our positions were very, very far apart," Merkel said at a Franco-German summit in the southern German town of Straubing. "I am very happy to be able to say that we both support the EU goal of 120
grammes per kilometre on all new EU cars by 2012."
The agreement came as a surprise after Berlin warned late last week that no settlement was expected in Straubing and described talks on the emissions limit as "difficult and complicated in detail."
The German government had strongly opposed the EU plans as vehicles made by cornerstone German firms such as BMW, Daimler and Porsche tend to be larger, luxury vehicles with greater emissions. France however backed the legislation as leading French carmakers such as
Peugeot and Renault tend to build smaller cars that pollute less.
Merkel said she had agreed with Sarkozy here that the EU proposal would apply from 2012 to all new cars produced, but stressed that it would only gradually be enforced with regard to existing models.
She added however that the German and French delegations were considering proposing to fellow European states that they should be more ambitious still and eventually aim to limit emissions to between 95 and 110 grammes per kilometre.
"The details will still have to be worked out by our environment ministers but we believe that this is giant step forward."
Merkel and Sarkozy hailed the agreement as proof that Germany and France can cooperate for the good of Europe, despite frequent disagreements. "We have proven again that France and Germany can work together. We have agreed to work together," the chancellor said.
She had earlier pledged to give France her fulsome backing France when it takes over the rotating EU presidency in July. "We are going to support France during its presidency of the EU."
In keeping with that pledge, French and German ministers said here they have agreed to cooperate on immigration - an issue on which France plans to propose a sweeping new EU pact once it takes over the presidency.
The two sides said they would work together more closely to fight illegal immigration and lobby other EU members to refrain from giving residency status collectively to large groups of illegal immigrants.
The summit also saw Sarkozy reiterate his proposal for European nations to cap value-added tax on oil to rein in prices skirting the $140 a barrel mark. He urged EU leaders to consider it at their summit in Brussels next week. "I have explained my position on oil taxes. The governments of all countries should think about it."
"We should try to find a common position when the time comes, which means June 18 and 19" in Brussels, he said. The proposal has run into resistance from other EU countries as well as the European Commission and met with little enthusiasm from Merkel.
"We have not taken a decision," she said.
Merkel and Sarkozy have had a stormy relationship since he took office last May and notably clashed over his proposal for a union of Mediterranean nations. She saw it as a bid to sideline Berlin and Sarkozy finally promised to open the union to all European nations. But observers say a summit on the project in July will show whether the compromise is holding.
On Monday, they made a show of unity at their last summit before France assumes the EU presidency on July 1. "France has come to tell you that we need Germany," Sarkozy said.
He praised Merkel as the woman who pulled the European Union out of its constitutional crisis and helped to deliver the Lisbon Treaty on a new organisational framework for the 27-nation bloc.
"When Europe was deadlocked, it was Germany and Madame Merkel that unblocked the situation."