Qatar Prime Minister Sheikh Hamad bin Jassim bin Jaber Al Thani signed the agreement in Stuttgart just 24 hours after VW sealed a deal to merge with Porsche. Under the agreement the Gulf state would also acquire stock options that Porsche holds in Volkswagen.

Porsche said in a statement that Qatar would buy 10 percent of the ordinary shares held by the car group's family owners - the Porsche and Piech families.

This will help pave the way toward a full merger between the two carmakers in 2011, which would create an auto giant with annual sales of about 6.4 million vehicles.

"It is clear that the group has the force to become No. 1," said Volkswagen chief Martin Winterkorn, who is to head up the new merged group.

Speaking in Wolfsburg Friday, Winterkorn said the new group would be backed up by an unrivalled global presence, technological development and model platform.

"We are forming an automotive group with some 400,000 employees, an unparalleled model range, global reach and of course the highest levels of technical expertise," said Winterborn in a speech to Volkswagen employees outlining details of the planned merger.

The German state of Lower Saxony, where VW has its headquarters, will retain a 20-percent stake and keep its veto-rights in the enlarged group. Qatar will eventually hold nearly 20 percent, becoming the third-largest shareholder of Europe's largest carmaker. The Porsche and Piech families, however, will remain the biggest shareholders.

If the merger goes through as planned, Porsche would become VW's seventh brand, joining other premium brands like Bentley, Bugatti, Lamborghini and Audi as well mass-market models such as Volkswagen and Skoda.

Porsche ran up 10 billion euros ($14.2 billion) in debt when it tried to secure a majority stake in a Volkswagen as part of a failed bid to takeover VW.

VW expects the merger with Porsche to boost earnings by about 700 million euros a year to put it in a position to challenge Japan's Toyota as the world's biggest carmaker.

"Porsche and VW are taking a big step towards the top of the world," said VW chief financial officer Dieter Poetsch.

Meanwhile, on the Frankfurt stock exchange on Friday the markets reacted negatively to confirmation of VW's takeover of Porsche with shares plummeting more than 15 percent. Traders view the 3.3-billion-euro price tag for a 42 percent share of VW as too high and are annoyed that Lower Saxony retains it privileged voting rights. On top of this, VW still needs a 4-billion-euro capital increase to finalize the merger.

nrt/dpa/Reuters/AFP
Editor: Nancy Isenson