German auto giant Volkswagen is seeking a controlling stake in national carmaker Proton, while South Korea's Hyundai is also interested in a tie-up.

Volkswagen had already proposed acquiring a 50 percent plus one share in the Malaysian company, the Edge financial newspaper said, quoting an unnamed source.

"It came as a bit of a surprise," the source was quoted as saying, referring to the size of the stake.

Volkswagen was seeking management control of Proton, whose biggest shareholder is the Malaysian government's investment arm Khazanah, the source said in the newspaper report.

Khazanah on Friday rejected speculation it planned to sell its majority stake in Proton after reports Volkswagen could purchase a 30 percent share.

"Khazanah Nasional, as the controlling 42.7 percent shareholder in Proton, wishes to state that it does not have any plans at this point to divest all or part of its existing stake in Proton," it said in a statement.

Khazanah added it remained committed to "current efforts to improve operations and the strategic position of the company, including the ongoing discussions with respect to a proposed alliance with Volkswagen."

The company announced last October it would assemble and sell VW cars locally and abroad as part of a "long-term strategic partnership" that could lead to technology sharing and the joint development of new models.

Hyundai: Strategic tie-up

Hyundai was also looking at a strategic tie-up with Proton's assembly plant and platforms, the Edge report said. No further details were provided.

Proton used to sell six out of every 10 new cars in Malaysia, the region's biggest passenger car market, but growing foreign competition is eating into its market share which fell to 44 percent last year from 48 percent in 2003.

Proton sales in the first half of 2005 stood at 75,983 vehicles, with a 40 percent share of the market, compared to 77,890 or 45 percent a year earlier, according to industry figures.