Daimler expects a gradual improvement in the group's operating profitability in the course of this year, it said on Wednesday, after it beat expectations for an even worse second-quarter operating loss.

Shares jumped 5 percent on the news, helped by quarterly figures that showed Daimler generated a positive free cash flow in its industrial business of 1.4 billion euros ($2.0 billion) amid a sharp 34 percent cut in Mercedes production.

The group posted a loss before interest and taxes of 1.00 billion euros in the second quarter, better than the average estimate for a 1.49 billion euro EBIT loss in a Reuters Poll of 20 analysts.

Chrysler-related expenses of 387 million euros along with 217 million euros in restructuring charges at its industry-leading trucks division weighed on quarterly results.

Daimler's cash cushion grew over the past three months. Net industrial liquidity rose to 4.57 billion euros at the end of June versus 3.74 billion euros on March 31.

While rivals such as Volkswagen expect to report a second-quarter profit thanks to a government incentive-driven boom in sales of small, affordable cars, Daimler and BMW have suffered due to their dependence on demand for large luxury saloons and SUVs to fleet customers.

After a weak first quarter for Mercedes-Benz, Daimler said earlier this year its passenger car business would gradually improve over the following nine months and even post a profit in the second half helped by the relaunch of its E-Class saloon that hit western European showrooms in March.

Chief Executive Dieter Zetsche has even suggested that the company could see a positive surprise over the course of the year, although he warned late in June that demand would recover only very gradually starting in 2010.

As a result, he has already indicated that Daimler would try next year to sustain savings of 4 billion euros planned for in 2009.

(Reporting by Christiaan Hetzner)