Oct. 29 (Bloomberg) -- Porsche SE climbed the most in at least 12 years on speculation the sports-car maker will profit from Volkswagen AG's fourfold increase as it takes steps to ease a so-called short squeeze. Volkswagen tumbled.

Porsche, which is Volkswagen's largest shareholder, jumped 37 percent to 63.05 euros in Frankfurt, the steepest gain since at least January 1996. Volkswagen slumped 45 percent to 517 euros. BaFin, Germany's financial-market regulator said it's reviewing ``possible market manipulation'' after Volkswagen surged 348 percent in two days.

The maker of the 911 sports car has options equivalent to 31.5 percent of Volkswagen's common stock, and said today that it may settle as much as 5 percent of the contracts to increase the supply of shares. The 5 percent stake increased in value by 10.8 billion euros ($13.8 billion) in this week's first two days of trading, data compiled by Bloomberg show.

``It's a huge gain'' for Porsche, said Albrecht Denninghoff, a Frankfurt-based analyst at BHF-Bank AG. ``For Volkswagen, it will get easier for short-sellers than in the last two days. But getting to normal levels, that is something else.''

Volkswagen is the most shorted stock in Germany's benchmark DAX Index. Porsche's announcement Oct. 26 that it plans to raise its stake in the German carmaker to 75 percent forced short- sellers to cover their positions and triggered a short squeeze that at one point yesterday made Volkswagen the largest company in the world by market value, surpassing Exxon Mobil Corp.

`State of the Market'

``Porsche SE intends -- depending on the state of the market -- to settle hedging transactions in the amount of up to 5 percent of the Volkswagen ordinary shares,'' the company said in a statement to the stock exchange. ``This may result in an increase in the liquidity of the Volkswagen ordinary shares.''

Had Porsche acquired the options at Volkswagen's closing price last week, the carmaker would have gained more than 734 euros per share, before taxes, if the options were exercised at yesterday's closing price. A 5 percent stake in Wolfsburg, Germany-based Volkswagen's common stock equals 14.7 million shares, data compiled by Bloomberg show.

Volkswagen's common shares had lured short-sellers who speculated the stock's 35 percent rise in 2008 through the end of last week was overdone given the outlook for car sales. Some investors have called for regulators to investigate Porsche's transactions.

`Acted Irresponsibly'

``Porsche has acted irresponsibly and that has damaged capital markets considerably,'' Henning Gebhardt, who helps manage the equivalent of $220 billion at DWS Investment GmbH in Frankfurt, said yesterday. ``Porsche snuck up on Volkswagen. They knew about the short sellers, and it must have been clear to them that there would be a massive short squeeze.''

Funds affected by wrong bets that Volkswagen shares would fall include Greenlight Capital Inc., SAC Capital Advisors LLC, Glenview Capital Management and Perry Capital LLC, the Wall Street Journal reported, citing unidentified prime brokers familiar with the positions.

Germany's financial-market regulator opened a formal investigation into the trading of Volkswagen for ``possible market manipulation,'' BaFin spokeswoman Anja Engelland said in an interview today.

Porsche rejects any allegations of market manipulation, Frank Gaube, a spokesman for the sports-car maker controlled by the Porsche-Piech family, said in an interview. The company closed a ``small'' part of its options holdings today, he said.

`Strictly Reject'

``We strictly reject the accusation'' that Porsche manipulated Volkswagen's share price,'' Gaube said. ``It is not up to us that a massive amount of people have taken short positions'' in Volkswagen, he said.

Until Oct. 26, Porsche had said it was aiming only for a stake exceeding 50 percent, and Chief Executive Officer Wendelin Wiedeking said at the Paris Motor Show early this month that a stake of as much as 75 percent would be ``not realistic'' because of market turmoil.

The Stuttgart, Germany-based carmaker said today it ``remains committed'' to increasing its stake in Europe's biggest carmaker to 75 percent and plans to continue to buy ordinary VW shares ``on and off'' the stock exchange at prices that are ``economically justifiable.'' The company has declined to give details on the options.

Porsche, which also makes the Cayenne utility vehicles, has a market value of 10.9 billion euros. The value of Volkswagen, maker of the Passat and Golf models, is 157.2 billion euros.

Citigroup Inc. today maintained a share-price estimate of 80 euros for Volkswagen, 85 percent below today's closing level.

DAX Weighting

Deutsche Boerse AG, operator of the Frankfurt stock exchange, said late yesterday it will reduce Volkswagen's weighting in the DAX to 10 percent after the stock's surge. VW represented 27 percent of the DAX after yesterday's rally, an increase from 6.8 percent on Oct. 24.

The share surge meant Volkswagen was having an outsized effect on the DAX. While it was the only company out of 30 in the index that gained on Oct. 27, Volkswagen's 147 percent jump was enough to drive the measure up 0.9 percent.

Stoxx Ltd. also reduced the weight of Volkswagen in benchmarks including the Dow Jones Euro Stoxx 50 Index.

To contact the reporters on this story: Alexis Xydias in London at axydias@bloomberg.net

Last Updated: October 29, 2008 15:18 EDT