Citing unnamed sources, German Magazine Focus said the Apple-developed device will combine entertainment, communication and navigation in a single console system.
Mercedes will reportedly have a six-month exclusive (translation) on the product when it's made available sometime in 2009. Further details, such as integration of Google Maps for navigation, are said to be unclear.
No other information was provided in the two-paragraph report by Focus, which has no track record when it comes to predictions for future Apple offerings.
A host of top automakers already offer elegant iPod integration solutions to car buyers, but none include Apple-developed navigational or entertainment components.
In 2004, Apple teamed with Mercedes rival BMW in delivering the first seamless integration between iPod and a car audio system.