Volkswagen briefly became the world's most valuable company yesterday when short sellers were forced to buy shares to cover positions after Porsche announced that it had indirect control of 74.1 per cent of VW.

Short-selling investors, who had sold shares in Europe's biggest carmaker in the expectation of a fall in price, were forced to try to cover positions with little stock available. Germany's Lower Saxony state retains a 20 per cent stake in the carmaker, leaving less than 6 per cent to trade in the market after Porsche's raid.

On Monday VW's shares nearly doubled after Porsche said that it owned 42.6 per cent and that it controlled 31.5 per cent through cash-settled options. Yesterday the rush to buy propelled the shares to an intra-day high of €1,005.01, valuing the company at €296billion or $370.4 billion, before closing slightly lower at €945. That was more than Exxon Mobil, the world's most expensive company, which was worth $343 billion at Monday's close.

Shares in European and American banks swung wildly amid rumours that they could be facing huge losses after betting on VW falling.

Société Générale, the French group, was hit by the speculation as its shares tumbled in Paris for the second consecutive day to close down 12.27 per cent at €33.33. The fall came despite SocGen's efforts to reassure markets that it had no skeletons in the cupboard - the third time this month that it has been forced to issue a statement in an attempt to calm fears over its health.

A Paris fund manager said: “All you would need would be to have shorted Volkswagen shares with too much leverage, and you would be facing colossal losses.”

In the US, Morgan Stanley and Goldman Sachs were also caught up in the latest wave of panic selling amid rumours that they could also be exposed to the VW short squeeze. Morgan Stanley denied the claims and sources at Goldman Sachs said that the group had no significant exposure.

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