Volvo announced on Friday it had taken a 13 per cent stake in Swedish truck and bus maker Scania and was weighing the possibility of a full merger, saying it would create the world's second largest truck manufacturer.Scania said the move felt like a hostile takeover. Scania's largest owner, the Swedish Wallenberg family who controls Scania through its investment company Investor, frowned upon the deal, saying it threw a spanner in the works of talks it had been holding.

Shareholders punished Volvo on Friday after the buy and traded Volvo shares four per cent lower, while Scania soared 19 per cent. Analysts questioned what the benefits of a merger would be, saying a combined group could lose market share.

The move raised expectations of a sale of Volvo's car operations asanalysts speculated about how Volvo would finance a full merger. Volvo acknowledged commercial vehicles would become more important to the company in the future.Swedish business newspaper Finans Tidningen cheered Volvo chief executive Leif Johansson's bold move, saying he was realistic that little Volvo could not survive against industry giants so the car operations should be part of a larger company. "Of course Volvo and Scania should merge. When the Wallenbergs quit sulking they'll also see a merger between the two is the best for everybody," the newspaper said.

Swedish tabloids, champions of the worker's cause, praised the deal. Volvo employs 45,000 in Sweden. "Unless Volvo sees the ownership position in Scania as preparation for a sale of the car operations to some foreign car maker. This would not be good for Volvo or Sweden," Aftonbladet said.The Swedish Shareholders' Association, the voice of thousands of small shareholders, gave the deal its nod of approval. Opposition from this group helped deraila merger between Volvo and France's Renault in 1993.

Much of tiny Sweden, recognising the Volvo name is its best known brand name worldwide, would not like to see Volvo car operations slip into foreign hands. "One major company after another has looked for and found cooperation possibilities outside the country... What will be left for us in Sweden to work for?" tabloid Expressen said.

The issue has emerged amid a politically sensitive debate about Swedish companies moving abroad to escape high Swedish tax, weary of supporting the country's expensive welfare system.

Last year Sweden's largest company, telecom group Ericsson, set up a second headquarters in London. London will also be the base of a new group to be formed through the merger of drug company Astra and Britain's Zeneca, also announced last year.

Saab Automobile is also based in Sweden, but has been half owned by US General Motors since 1990 to be taken over completely by the US group in the future.

Speculation has linked Volvo's car unitwith Italy's Fiat, Germany's Volkswagen and US Ford Motors. Expectations of a spin-off have been further fuelled by Volvo hiring investment bank JP Morgan to investigate the sale of its car operations.