Russia's car market had been set to become Europe's largest, before the downturn left thousands of people out of jobs and the credit crunch hit lending.
Avtovaz, which is 25 per cent owned by Renault, the French carmaker, has been losing money for years, with demand for its Lada sedan falling sharply in the economic downturn.
The company's sales dropped by 44 per cent in the first six months of the year, according to the Association of European Businesses in Russia.
Igor Komarov, president of Avtovaz, approved the latest layoff plan at a meeting with a trade union on Wednesday.
The carmaker said it plans to rehire 6,000 workers by 2012 for a new production line that it is developing with Renault.