By William Ickes

FRANKFURT - Volkswagen shares set fresh records on Tuesday as Porsche geared up to take over Europe's biggest carmaker, with speculators who had bet the stock would crash getting badly caught out by the gains.

VW shares nearly doubled in value to 1,005.01 euros (S$1889) in early trading on the Frankfurt stock exchange in a shock wave generated by a Porsche statement on how and when it planned to take over the group.

Regent Markets analyst David Evans noted that Volkswagen "temporarily became the world's largest company by market capitalisation, overtaking ExxonMobil for a short while as it rose above 1,000 euros."

VW shares later tumbled back but still closed at 945 euros, a massive gain of 81.73 percent that followed a stellar performance on Monday.

The DAX index of leading shares gained 11.28 percent, largely supported by the charge in Volkswagen which more than offset continuing losses elsewhere on concerns about the ongoing global financial crisis.

A spokeswoman for stockmarket watchdog BaFin told AFP it was "examining" transactions for signs of insider trading but added: "As far as a formal investigation is concerned, it is too early to say and a decision is not expected this week."

Speculators had previously targeted VW, borrowing shares in the company to bet that the automaker's price would inevitably tumble due to slumping demand. However, as Porsche locked up more and more of the shares, there were less and less to go around for other investors ? including the short-sellers ? to get their hands on to settle their deals.

As a result, the share price began rising, forcing the short-sellers to buy the stock to cover their positions, which in turn only drove the price higher again still in a self-perpetuating circle.

"What we have seen this week is definitely short covering," UniCredit equity analyst Christian Aust told AFP. "Nobody else would buy Volkswagen shares at those prices. It doesn't make any sense."

He suggested the buyers could include hedge funds and bank proprietary desks, which manage a financial institution's stock positions, but stressed it was not completely clear.

Fellow UniCredit analyst Tammo Greetfeld said: "One can guess that hedge funds are among them because they are the usual suspects in this kind of business."

On Sunday, Porsche said it had gained control of 74.1 percent of the shares in VW via a direct 42.6 percent stake and options giving it access to another 31.5 percent.

Porsche said it aimed to increase its direct stake to more than 50 percent by the end of the year, pending favourable market conditions.

"That put pressure on investors who have sold this stock short," Greetfeld noted.

A Porsche spokesman told Dow Jones Newswires the volatile stock price could distort its own balance sheet.

"We have no interest in putting VW on our books at such an economically senseless price," he said. "A fair value for VW certainly lies below the current share price."

On Monday, VW shares shot up by more than 200 percent at one point and closed with a gain of more than 146 percent, pulling the entire DAX index into positive territory in the process.

Aust said that with Porsche controlling 74.1 percent of VW and the German state of lower Saxony owning 20.1 percent, "the real free float, what is really available, should already be less than six percent."

A spokesman for the Frankfurt stock market told AFP there was no reason to suspend trading in VW shares despite what Greetfeld called "such an extraordinary move" in the past two days.

"In the case of Volkswagen, there has been no breach of market rules, therefore no reason to suspend quotations," the spokesman said.

Aust remarked that "what is astonishing is that there is still so much volume."

On Tuesday, more than 12 million VW shares changed hands.

"That means somebody must be giving shares," the analyst said. "Maybe it is Porsche, maybe it is Lower Saxony, I don't know."

In contrast, shares in rivals like BMW and Daimler have been hammered in the past year as increasing signs of an economic slump saw investors pile out of auto stocks.

Aust noted that in September, VW shares spiked to around 450 euros even as financial markets plunged following the failure of US investment bank Lehman Brothers.

A spokesman for the small shareholders association SdK, Lothar Gries, told AFP that few of those he represented still held VW shares, since "many have certainly sold them to Porsche or to others."

Once the dust had settled around VW, Aust said "we'll see a drop of course ? but it's not falling back to the 150-200 euro level."