Berlin  - German Chancellor Angela Merkel dug her heels in Friday in a dispute with the European Union and Porsche about state influence over Europe's biggest carmaker, Volkswagen.

Her spokesman said Germany would not repeal legislation that grants the state of Lower Saxony veto powers at VW.

Only the state of Baden-Wuerttemberg, home of luxury carmaker Porsche, has spoken up in favour of the EU. But on Friday it quietly dropped a challenge in the Bundesrat upper chamber to the German legislation.

The Merkel government has drafted a reform of the legislation on Volkswagen which it believes satisfies EU law while cementing the veto powers asserted by Lower Saxony with just over 20 per cent of VW shares.

The two states squabbled Friday in the Bundesrat, but the chamber then voted its blessing to the Merkel government's reform law, which will be debated next in parliament's lower chamber.

"German company law is no business of the EU," said Lower Saxony state premier Christian Wulff in the debate.

Merkel spokesman Thomas Steg said she would defend the veto law to the European Commission, which has threatened to fine Germany if it does not repeal the law.

Porsche opposes the law and is seeking to cut down the influence of Lower Saxony and Volkswagen unions.

It said Friday it would next week be asking Volkswagen for financial data, so that Porsche could begin compiling consolidated accounts treating Volkswagen as a subsidiary.

Porsche proclaimed this week its effective majority control of its larger competitor with 35 per cent of the shares, enough to dominate shareholder meetings where fewer than 70 per cent of shares are ever represented.

Volkswagen shares traded at 262 euros Friday afternoon, down 14 per cent after surging 27 per cent Thursday amid a so-far unexplained rash of buying. Both Porsche and Lower Saxony denied they were the buyers. (dpa)