FRANKFURT, August 1, 2008 (AFP) - Germany's biggest airline Lufthansa struck a pay deal with ground personnel that will end a costly strike in the middle of the peak summer holiday season, the company said.

The accord with the powerful Verdi service-sector union foresees a 5.1-percent wage increase for 34,000 employees backdated to July 1 and another 2.3-percent hike from July 2009, plus a one-off payment linked to profits.

The contract will cover a 21-month period ending February 2010.

Verdi confirmed it would end the strike, which had led to the cancellation of hundreds of flights during the peak summer holiday period, on Saturday at 0400 GMT.

'Despite the wage agreement, it will take up to two more weeks before flight service is normalised,' because a number of maintenance checks had not been carried out during the strike. said Lufthansa spokesman Peter Schneckenleitner.

About 130 flights will have to be cancelled each day until Monday.

Human resources chief Stefan Lauer said the walkouts had cost both the company and its staff heavily.

'This is an outcome that of course is not painless for either side,' he said. '(But) the fact that we were able to resolve the wage conflict internally sends an important message to our passengers and also to our staff and about Germany as a place to do business.'

Lufthansa transports 150,000 people daily on average, and July is one of its busiest months.

Lauer said Lufthansa could justify the cost of the deal -- estimated at 100 million euros per year -- to its shareholders due to the lengthy period the agreement covers.

But he said it was now up to personnel to boost productivity to compensate for the salary hike.

Verdi acknowledged that the agreement fell short of the 9.8-percent pay rise it had been seeking.

'In the end we reached an outcome that of course does not meet all of our colleagues' expectations but that Verdi can live with,' the union's chief negotiator during the dispute Erhard Ott said.

A trade union expert at the German Institute for Economic Research, Hagen Lesch, said he thought the deal was fair.

'If you include the one-off payment, the wage agreement is higher than that in many manufacturing sectors,' he told the online service of Der Spiegel newsweekly.

'Compared to other service-sector deals, Verdi is in the upper tier with this one.'

Lufthansa has a released a healthy profit forecast for this year despite a shaky economy and the skyrocketing cost of fuel.

The industrial action came as German labour steps up its demands for higher pay to keep pace with rising consumer prices, which grew 3.3 percent in June on a 12-month basis, the biggest increase since December 1993.

A study by the WSI economic research institute, traditionally close to Germany's trade unions, showed that 900,000 employees staged warning strikes during the first six months of the year. The actions hit the metalworking, textiles and postal sectors among others.

'Wage talks have become much tougher' in a country known for relatively harmonious relations between management and labour, WSI expert Heiner Dribbusch said. 'Employees are more ready to mobilise now.'

The Federal Labour Agency, which keeps track of industrial action, said there had been more strike days in Germany since 2006 than in the decade before.