The fund, Aabar Investments, is to invest €1.95 billion ($2.65 billion dollars) buying new shares issued by Daimler, a joint statement said, which will make it the single biggest shareholder in the group.
"We are delighted to welcome Aabar as a new major shareholder that is supportive of our corporate strategy," Daimler chairman Dieter Zetsche said in the statement.
The two companies plan to collaborate developing electric vehicles in a bid to reduce carbon dioxide emissions and also said they would set up an auto industry training centre for young people in Abu Dhabi.
Daimler swung into the red in the fourth quarter, hit by the fall in the market for cars and by write-offs linked to its remaining stake in loss-making US carmaker Chrysler.
Daimler, which sold off most of its stake in Chrysler in 2007, is struggling with falling demand for its luxury vehicles and a shrinking market for trucks.
In 2008, Daimler employed more than 270,000 people worldwide and produced 2.1 million vehicles. It has since launched a swingeing cost-cutting programme to adapt the changes brought on by the financial crisis.
Aabar will take the lion's share of the 96,408,000 new shares to be issued by Daimler at a price of €20.27 a share, said the joint statement.
The deal is to be put to annual shareholders for approval on April 9, it added.
"Daimler is an iconic brand and a financially strong company with a reputation for excellence worldwide," Aabar chairman Khadem Al Qubaisi said.
Aabar invests in a number of other sectors including energy, infrastructure, real estate, and financial services.
Its main shareholder is the International Petroleum Investment Company (IPIC), which is wholly owned by the government of the Emirate of Abu Dhabi.
Once the deal goes through Kuwait, which has invested in Daimler since 1974 and was previously the biggest shareholder, will see its stake reduced to 6.9 percent from the current level of about 7.6 percent.