FRANKFURT: Volkswagen, Europe's biggest carmaker, and luxury auto manufacturer Porsche said on Thursday they had approved a plan to merge by 2011 and create an automotive giant.

Volkswagen chief executive Martin Winterkorn becomes head of both Porsche and VW after the agreement to tie up the companies, announced by the firms' supervisory boards.

The merger of the car giants draws a line under a four-year battle marked by multiple twists and turns, family feuds and boardroom battles.

"We have more than ever the means (to become) number one in the automotive industry," Winterkorn said.

It marks a clear victory for VW chairman Ferdinand Piech, nicknamed "the patriarch" by German media, and the failure of Porsche's bid to take over their far larger rivals.

Under the terms of the agreement, Volkswagen will initially buy a 42-percent stake in Porsche by the end of 2009 for 3.3 billion euros (4.7 billion dollars), a deal that values Porsche at 12.4 billion euros, the companies said.

Volkswagen will then increase its capital in the first six months of 2010 by issuing new preferred shares and Porsche will increase its capital in the first half of 2011 by issuing ordinary and preferred shares.

The deal comes after months of complex and acrimonious negotiations.

Volkswagen eked out a net profit in the second quarter despite a collapse in demand for cars due to the global economic crisis and it plans to become the world's biggest automaker by 2018 by overtaking Japan's Toyota.

VW's link-up with Porsche may bring it a step closer to this goal, as the carmaker strengthens its position as top European manufacturer with more than 400,000 employees worldwide and an annual production of 6.4 million cars.

The group will now work to integrate Porsche as its 10th brand, alongside the Audi, Bentley, Bugatti and Lamborghini, although the companies stressed on Thursday that Porsche would remain an "independent" brand.

"The autonomy of Porsche will be guaranteed in the integrated group," Volkswagen said in a statement.

Porsche's supervisory board said that Winterkorn would become its new chief executive while remaining boss at VW, a post he has held since 2007.

In addition, Volkswagen chief financial officer Hans Dieter Poetsch takes up the same role at Porsche.

There were no further details of the role to be played by the Gulf state of Qatar.

Winterkorn had previously announced Qatar would take a direct 17-percent stake in VW by acquiring stock options owned by Porsche.

Negotiations with Qatar would continue, Volkswagen said Thursday.

Winterkorn said the "integrated group" would give Porsche "new opportunities for growth".

The plan seals the failure of a gamble begun by Porsche's management last year to take over the far larger VW in what would have been one of the most spectacular corporate operations in German history.

The deal also marks a victory for VW chairman Piech, grandson of the inventor of the VW Beetle, who has been planning the tie-up with Porsche for years.

In September 2005, Porsche announced plans to acquire a 20-percent stake in VW, triggering the start of the long battle in the European auto industry.