Volkswagen AG (VOWG.DE) agreed on Saturday to give workers at its plant in Mexico a small raise, clearing the way to end a strike in an industry already hurt by the U.S. recession.

Volkswagen said in a press release it agreed to give workers, who went on strike on Tuesday, a 3 percent raise and a one-time cash payment.

We'll be removing our strike banners as of 10 in the morning and work will resume as of 10 at night, said union official Victor Jaime Cervantes.

Volkswagen is one of Mexico's biggest manufacturers, and like the rest of Mexico's auto industry its Mexican plant has been hit hard by the U.S. recession.

Mexico's auto output fell 25 percent in July from a year earlier.

The Puebla plant is the company's only North American facility and the sole producer of the popular New Beetle model.

Labor costs at Volkswagen in Puebla continue to rise while the rest of the auto industry in Mexico did not give raises this year. This obliges the company to reinforce measures to improve production, Volkswagen said in a statement.

Plummeting auto exports have been a leading factor in Mexico's recession, with the economy this year expected to contract more than any time since 1932.

Volkswagen is Mexico's No. 2 automaker, sending most of its cars to the United States, Canada and Europe. It builds 1,500 cars a day at the plant for both the Mexican market and for export.

Volkswagen plans to begin assembling a new compact car at its Puebla plant, its only North American production facility, early next year following a $1 billion investment.

(Reporting by Julio Martinez, editing by Vicki Allen)