A stake of that size would be worth $4.5 billion at current market prices. Although Daimler declined the offer, it told Geely it was welcome to buy shares in the open market, the sources added.
Carmakers in China have embarked on a flurry of dealmaking, as they scramble to boost production of electric and plug-in hybrid vehicles ahead of tough new quotas to be imposed by Beijing, which wants to reduce urban smog and lower the country's reliance on oil.
People with knowledge of Geely's thinking said the company was keen to access Daimler's electric car battery technology and wanted to establish an electric car joint venture in Wuhan, the capital of Hubei province. Geely, which also owns Swedish car maker Volvo, is still hopeful it can secure a deal in some form over the coming weeks, they added.
The two automakers met in Beijing in recent weeks at Geely's behest. There, the Chinese firm, formally known as Zhejiang Geely Holding Group, offered to take a stake of between 3 percent and 5 percent if Daimler would issue new shares at a discount, the sources said.
It was not immediately clear what kind of discount for the shares Geely had in mind or whether Geely was interested in buying the shares on the open market.
A spokesman for Geely declined to comment. A spokesman for Daimler said the company was "very happy with our shareholder structure at present", but added that it would welcome new investors with a long-term interest in the company.
Shares in Daimler were up 1 percent in early Wednesday trade, in line with the broader market.
DAIMLER ALREADY TIED TO BAIC, BYD
Geely, which has a market value of some $32 billion, is the leading domestic brand in China with a 5 percent market share, according to an analysis by Nomura Securities.
A stake of 5 percent would establish it as Daimler's third-largest shareholder behind the Kuwait Investment Authority and BlackRock, who hold 6.8 percent and 6 percent respectively, according to Reuters data.
Daimler, however, has a long-established joint venture with Chinese carmaker BAIC Motor Corp, which its spokesman described as "our most important partner in China." This month it announced plans to invest at least 5 billion yuan ($757 million) in electric battery and vehicle production with BAIC in China. It also has another tie-up with BYD, a Chinese automaker backed by Warren Buffett.
The maker of Mercedes-Benz cars has previously held similar discussions about an investment from BAIC. But Daimler has consistently refused to issue new shares out of concern for existing shareholders.
Other recent potential deals involving global and Chinese automakers include Ford Motor Co's announcement in August that it is looking at setting up an electric car venture with Chinese firm Zotye Automobile Co Ltd.
Any deal involving an equity stake in Daimler would be Geely's largest since it bought Volvo for $1.8 billion in 2010. This week, Geely and Volvo launched the first car in China under their new brand, Lynk & Co, which the Chinese group intends to eventually take global.
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