The auto industry is struggling, but for a few minutes on Tuesday, Volkswagen became the most valuable company in the world, one with a market value greater than Apple, Philip Morris and Intel combined.

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That soaring value reflected engineering of a financial, rather than automotive, sort. It came as stock traders scrambled when Porsche, a rival seeking to build one of Europe’s great car dynasties, revealed it had increased its holdings in VW, giving it an economic stake equal to about 75 percent of the company’s voting shares.

Volkswagen’s stock soared to as high as 1,005 euros a share, about $1,258, on Tuesday before closing at 918 euros. The shares ended last week at 210 euros.

The rise appears to have come from a short squeeze of historic proportions, as speculators who had borrowed the stock and sold it scrambled to buy shares. Many had expected the share price to fall after Porsche gained control and stopped buying shares.

Among the known short sellers are two large American hedge funds, Glenview Capital and Greenlight Capital. It is not clear if, or at what price, they covered any of their short positions.

Porsche now has huge paper profits, while some Wall Street firms may be facing losses that are just as big.

On Sunday, Porsche said it raised its stake in Volkswagen to 42.6 percent from 35 percent, and that it had taken options for another 31.5 percent.

Porsche said it made the announcement to give investors who sold the stock short “the opportunity to close their positions unhurriedly and without bigger risk.”

The opposite happened. The risk soared, and the short sellers were forced to act quickly.

“We’re getting a sense of the sturm und drang in the markets now,” said Michael Holland, the manager of Holland & Company, an investment management firm. “When you get into panicked markets as we’ve had in the past few months, you get these vicious moves which happen on the downside and then to the opposite direction. It’s incredible to watch.”

German regulators are scrutinizing the torrent of panicky trading, but it is not clear if they will act.

Porsche has waged a series of bitter legal and political battles over the last three years to gain control of Volkswagen.

Its strategy has been to make a creeping takeover of the company, purchasing options or shares in the open market and later announcing its new shareholding level in the company.

Porsche, the maker of legendary sports cars like the 911, earlier this year suggested it would stop its purchases when it got near 50 percent. That calmed long-running tensions with the German state of Lower Saxony, which owns a 20.2 percent stake in VW.

Volkswagen has a deal that would force Porsche to take control of the Swedish truck maker Scania, if it takes a majority stake in VW. That could cause Porsche to stop buying stock.

Hedge funds had used several strategies in VW shares. One was to exploit the difference in value between two classes of Volkswagen stock. Another was to buy into Porsche while betting that Volkswagen shares would fall.

As of last week, roughly 12.9 percent of Volkswagen shares were lent out, according to Data Explorers, a London-based research firm.

Volkswagen is one of the 30 companies in the DAX index, Germany’s most prominent stock index, and index funds own a significant number of shares.

Those funds, however, may sell shares Wednesday. On Tuesday night the German stock exchange said it would reduce from 27 percent to 10 percent the weighting of VW in the index. To rebalance, the funds will have to sell VW and buy the 29 other companies.

Porsche gave few details of the options, other than to say they would be settled in cash.

Whoever sold Porsche the options might have been scrambling to buy shares this week to cut risk. When the options expire, Porsche will receive the difference between the market price of the shares and the exercise price of the options.

That could amount to tens of billions of euros. It seems unlikely that Porsche would have had the cash to exercise the options if it were required to pay for them and take delivery of the shares, but cash settlement means it will not have to put up cash if the options are profitable.

Shares in Morgan Stanley, Goldman Sachs and Société Générale of France tumbled during trading Tuesday, but the American firms made up the losses in the last hour of trading.

Jeanmarie McFadden, a spokeswoman for Morgan Stanley, said the firm had less than $25 million in exposure to Volkswagen. A person who had talked to Goldman officials, but who refused to be quoted by name, said that firm did not have a large exposure to Volkswagen.

Porsche has made big profits on trading options in VW before. Most of the profits it earned in its 2007 fiscal year came from that source, but the potential profit from these options could vastly exceed that amount.

One hedge fund manager, Larry Robbins, the chief executive of Glenview, wrote to investors last week that his fund had shorted the stock.

“Fundamentally, things look bleak for the global automotive industry,” Mr. Robbins wrote. He added that the fund was “committed to maintaining the short exposure for the eventual recoupling between the stock and its intrinsic value.”

Another hedge fund, Greenlight Capital, told its investors that it expected to profit eventually. “On a fundamental basis,” wrote David Einhorn, the manager, “we believe that Volkswagen is highly overvalued.”

It is not the first time Volkswagen shares have fallen prey to speculative gyrations. It lost a quarter of its value on Oct. 20, amid worries that Porsche might be able to steer decisions at the larger company to its advantage.

Although the two companies are linked by one powerful individual, Ferdinand Piëch, who heads Volkswagens board and also sits on Porsche’s, VW employees and their union have fought against a full takeover by Porsche, largely through their alliance with Lower Saxony, whose “golden share” lets it block major decisions about Volkswagen.

But the European Union is closing in on a ruling that could force Germany to alter the law underpinning the state’s stake. That has created an opening for Porsche to take control.