UPDATE 2-Porsche set to give Volkswagen stake to Qatar-sources

* Porsche ready to surrender VW share options - sources

* Deal would allow marriage of VW and Porsche

* Qatar attention shifts to Volkswagen as Porsche skids

* Volkswagen stock closes up almost 12 percent

(Adds shares)

By John O'Donnell, Edward Taylor and Arno Schuetze

FRANKFURT, June 24 (Reuters) - Porsche is advancing towards a deal with Qatar to give the Gulf state a shareholding in Volkswagen, a compromise that will clear the way for the car makers to merge, according to people involved in the talks.

Porsche (PSHG_p.DE) racked up 9 billion euros ($12.7 billion) of debt trying to swallow its much bigger rival Volkswagen (VOWG.DE) before the financial crisis turned the tables and threatened to unravel the deal.

The luxury carmaker then entered talks with Qatar about selling a stake in Porsche but -- with Volkswagen now set to dominate the marriage to its debt-hobbled partner -- Qatar's interest has shifted to Volkswagen.

Merger talks are on ice until Qatar decides whether or not to invest.

In a bid to save the merger, Porsche is now prepared to surrender its right to buy about a fifth of Volkswagen's voting shares, said sources with direct knowledge of the matter. Porsche already owns roughly 50 percent of VW stock.

"This is the most likely option," said one source with direct knowledge of the matter. "It looks as if Qatar will buy Volkswagen shares," said a second. A person close to Porsche said that "all options are on the table".

Shares in Volkswagen spiked on the news amid heavy trading and closed up almost 12 percent to roughly 244.16 euros. Porsche's stock closed up 3.4 percent at 43.07 euros.

The carmaker's alternatives for repairing its tattered balance sheet are dwindling after strong signals from the government that its request for state aid will be rejected. [ID:nLM720161]

BUMPY ROAD

A planned capital increase to open its doors to Qatar's sovereign wealth fund, the Qatar Investment Authority, had been expected to raise more than 4 billion euros.

"Selling the Porsche options (in VW) would solve the financing problems (of Porsche)," said a third source. "They (Qatar) would be the third-biggest shareholder in Volkswagen alongside the majority shareholder Porsche.

"This would not be much different than if they were directly invested in Porsche and through Porsche indirectly invested in VW," he said, adding that Qatar would be keen on getting a blocking minority stake.

A deal with Qatar could put the Gulf state on equal footing with Volkswagen's second biggest shareholder, the state of Lower Saxony. The Qatar Investment Authority could not immediately be reached for comment.

The German state can veto Volkswagen management with its 20 percent blocking vote and would be opposed to a deal with Qatar that would water down its influence.

Porsche declined to comment and Volkswagen finance chief Hans Dieter Poetsch refused to discuss the matter when approached by Reuters.

Gulf Arab sovereign wealth funds, which lost heavily investing in companies such as Citigroup (C.N), are eyeing a bigger role in the auto industry.

(Additional reporting by Hendrik Sackmann and Jan Schwartz)