The woman, whose name has not been revealed, has said she purchased a new Mercedes from an authorized dealer in the northern city of Xi'an only to discover afterwards that it was leaking oil on the showroom floor.
A video was posted showing her sitting on the hood of a car in the showroom and angrily accusing sales staff of dodging her demands for a refund.
The woman also alleged in later media interviews that she originally wanted to pay cash for the car but was pressured by the dealership into taking out a loan that came with high fees.
"We're very sorry for whatever happened," said Hubertus Troskas, a board member and head of China operations for Daimler, Mercedes' parent group.
"We have reached an agreement with the customer and she will continue to be a Mercedes customer," he added, speaking to journalists on the opening day of the Shanghai Auto Show.
But the irate buyer said in a Chinese media interview posted on Monday that she would continue to refuse any settlement offer by Mercedes, saying she wanted the matter fully investigated by consumer protection authorities first.
Daimler, as well as government authorities in Xi'an, have already announced investigations.
"This is nothing we approve of. We go by the law," Troskas said on the opening day of the Chinese auto show.
"There is good consumer protection in China and we want all of our dealers to work to the letter of the law and the ethics of our brand," he said.
"We clearly have to apologize. That has not been dealt with properly."
The woman has alleged that when she requested a refund, the dealership first offered to repair the leak, and then to install a new engine.
Her complaints have sparked a flood of supportive online comments by Chinese web-users, with many relating their own consumer horror stories.
The episode is the latest in a series of cases to show foreign brands the power of Chinese netizens.
Last year, Mercedes-Benz apologized for "hurting the feelings" of China's people after its Instagram account used a quote by exiled Tibetan spiritual leader the Dalai Lama, who is vilified as a separatist by Beijing.
Also last year, Italian fashion house Dolce & Gabbana apologized to Chinese consumers after its products were pulled from lucrative Chinese e-commerce platforms over an Instagram post by the brand that was seen in China as culturally offensive.
And hotel group Marriott's website in China was shut down by authorities after a customer questionnaire listed Taiwan, Tibet and Hong Kong as separate countries, angering Beijing. Marriott apologized and change the wording.
Global carmakers have gathered for the Shanghai Auto Show amid a rare sales slump in the world's largest vehicle market stemming from a range of economic and trade factors.