UPDATE 1-Kloeckner shares jump after investor Knauf buys stake

* Knauf encouraged by own steel distribution activities

* Indicates that Knauf, Kloeckner would be geographic fit

* Knauf Interfer unit says purchase is strategic investment

* Kloeckner shares jump more than 10 pct (Recasts with share reaction, adds trader and analyst quote, details)

By Ludwig Burger

FRANKFURT, Feb 19 (Reuters) - Shares in German steel distributor Kloeckner & Co SE jumped more than 10 percent after a stake purchase by billionaire investor Albrecht Knauf sparked speculation he could be planning a full bid.

The stock was trading at 10.535 euros by 1304 GMT, after rising to a 10-month high of 10.55 euros in the wake of a statement revealing the purchase issued after Monday's Frankfurt market close.

Speaking on condition of anonymity, one trader said the acquisition could represent another example of a wealthy German industrial family targeting a large listed rival, citing car parts maker Schaeffler's attempt to take over peer Continental AG as a precedent.

Knauf did not say if he planned to further increase the stake in Kloeckner or even make a full offer, but said raising his holding to almost 8 percent was part of a drive to further expand in steel trading.

Knauf Interfer, an Essen, Germany-based steel distributor that is part of Albrecht Knauf's construction materials group, said on Tuesday its new Chief Executive Klaus Kremper was overseeing a expansion of its steel trading activities.

"In light of this background, the purchase of Kloecker & Co shares is a strategic investment," it added. "Engaging in steel distribution has been a positive experience for the family of Dr. Albrecht Knauf for many years."

LARGEST SHAREHOLDER

The rise in Kloeckner shares gave it a market value of more than 1 billion euros ($1.3 billion). The stock was the biggest gainer on Germany's midcap index MDAX, which was up 0.8 percent.

"In as much as the stock has been very cheap, such a step does not come as a surprise," said market analyst Heino Ruland at Ruland Research.

A stock exchange announcement late on Monday said Knauf had become Kloeckner's largest shareholder by taking a 7.82 percent stake.

Knauf's interest comes despite a sector slump. Kloeckner, Europe's biggest independent steel trader, said in November it saw no near-term respite from massive overcapacity, adding it was extending its job-cutting plans.

Knauf made his fortune selling gypsum, which remains the mainstay of his diversified construction materials group with 23,000 staff.

Knauf Interfer also indicated that it and Kloeckner would complement each other geographically. While Knauf Interfer mainly sells in Europe, Kloeckner also had presence in the United States and Asia, it said in its statement.

Financial sources have told Reuters Knauf had mandated Deutsche Bank to advise him.

Knauf Interfer's annual sales volume of 1.3 million tonnes compares with Kloeckner's 6.7 million tonnes in 2011. ($1 = 0.7490 euros) (Additional reporting by Hakan Ersen and Francesco Canepa; Editing by David Holmes)