Just because BMW declined Mercedes' public offering to develop engines together doesn't mean that the 3-pointed star and the roundel can't work together at all. Mercedes has a B-Class car arriving in 2011, and it needs motors. BMW and Peugeot have developed 4-cylinder direct injection lumps that power the MINI, and Mercedes is eying the cutting edge powerplants for its new compact car.
The new B-Class would take the place of the current A- and B-Class cars cars, and come in five flavors: 3-door, 5-door, SUV, coupe, and convertible. BMW announced just this month that it would be ending its partnership with Peugeot on those engines, so it is unclear how Mercedes would get them in 4 years time. Regardless, Mercedes is due to make a decision about what powers the new B-class by next month.
[Source: Auto News, sub req'd]