The landmark 35-month deal for 2.3 million federal and local employees — ranging from bus drivers and garbage collectors to nurses and office staff — was agreed by union representatives and government employers on Wednesday in Potsdam, just outside Berlin.

The agreement came after nearly two years of behind-the-scenes talks.

The move to modernize 3,000 pages of public sector work regulations reflects developments in the private sector, where many companies have launched a determined drive to boost profits by introducing tougher working conditions and cost-cutting measures.

Under the new deal, public-sector workers — long envied for what are perceived as their cushy jobs immune from business realities — will see their salaries frozen through 2007.

In exchange, workers will receive three one-off annual payments of 300 euros ($380) regardless of their basic pay.

Federal-government employees in western Germany will work 30 minutes longer each week for a total of 39 hours, while the 40-hour working week for their counterparts in the east will be cut by one hour.

The VKA association of municipal government employers said workers had also agreed to the introduction of a merit-based pay system. Employees are currently paid according to factors such as martial status and length of service.

Government employers have argued that they need a flexible pay scheme to recruit well-qualified workers who take a dim view of a system automatically that pays older workers more than younger ones with the same skills.

The new deal doesn’t affect the 800,000 workers employed by Germany’s 16 federal states, where negotiators hope to push through additional cuts.