LONDON (Dow Jones) -- Porsche Automobil Holding on Wednesday said it would sell up to 5% of its stake in Volkswagen AG to meet unprecedented demand for the Wolfsburg automaker's stock after arguably the biggest short squeeze in stock- market history.

The move's designed "to avoid further market distortions and the resulting consequences for those involved," Porsche said -- but laid the blame for this week's massive rise in VW shares squarely with the short sellers themselves.

"Porsche denies all responsibility for these market distortions and for the resulting risks to which the short sellers have exposed themselves," the company said in a statement.

"Porsche wishes to point out that the applicable capital-markets law provisions have been complied with at all times. Porsche has not been active in the market during this share price movement."

Porsche said it alerted the German Federal Agency for Financial Services Supervision, or BaFin, prior to taking the step.

Volkswagen on Tuesday briefly became the world's largest company by market capitalization -- valued at more than all the other publicly traded automakers combined -- as part of a two-day, 348% surge.

The scramble for Volkswagen shares, already apparent during the last two months, intensified when Porsche over the weekend revealed that it had increased its equity stake in VW to 42.6% from about 35%, and more crucially, that it had options to buy another 31.5%.

Porsche had previously indicated it was looking to take a stake of more than 50% in VW but had not previously said it was going after three-quarters control. Porsche on Wednesday reiterated its commitment to going after a 75% stake "at prices which are economically justifiable."

The scramble for VW stock was intense in part because there were so few shares available: Porsche has effective control over 74% of VW, and the Lower State of Saxony, which is fighting both Porsche and the European Union to preserve a blocking stake, has another 20%.

Banks including Goldman Sachs (GS) and Societe Generale have been hurt by speculation of involvement in the VW short squeeze.

A Wednesday report in The Wall Street Journal, citing people familiar with the funds, named some of the most famous hedge-fund managers as being caught in the VW short squeeze: Greenlight Capital, SAC Capital, Glenview Capital, Marshall Wace, Tiger Asia, Perry Capital and Highside Capital.

Volkswagen's shares came back down to earth, a bit at midweek, dropping 41% to 553 euros in Frankfurt.

It was Porsche shares that vaulted higher, rallying 35% as the luxury automaker's market capitalization reflects just a fraction of the valuation of its VW holding.

The stake sale could lead to profits of roughly 1.5 billion euros, Commerzbank analysts said, estimating that Porsche's strike price was 100 euros and that the VW shares are sold at 200 euros each.

Meanwhile, index compilers moved to reduce the Volkswagen impact as well.

Deutsche Boerse said it will reduce the weighting of Volkswagen shares on its DAX index to 10%. The weighting had reached 27% at Tuesday's close.

Separately, Stoxx said Volkswagen's free-float factor will be reduced to 0.3732 from 0.4963.

The Commerzbank analysts said the index compilers' moves will also free up stock as index trackers won't need to hold as many VW shares. They estimated that 2% of VW's free float will be released by the move.

Stoxx is a joint venture of the Deutsche Boerse, the Swiss Exchange and Dow Jones & Co. MarketWatch, the publisher of this report, is a unit of Dow Jones.

  (END) Dow Jones Newswires
  10-29-08 0844ET
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