UPDATE 2-Infineon plans $1 bln capital hike, Apollo involved

* Apollo could take stake of up to 29 pct

* Apollo aims to have at least 15 pct

* Shares rise as much as 5.8 pct (adds analyst comment, CDS rally, updates shares)

By Nicola Leske

FRANKFURT, July 10 (Reuters) - Struggling German chipmaker Infineon (IFXGn.DE), working to ease its financing needs, plans to raise 725 million euros ($1.0 billion) in a capital increase with the backing of U.S. investor Apollo.

Infineon plans to launch a rights issue of up to 337 million shares with a subscription price of 2.15 euros, the company said in a statement on Friday.

U.S. activist investor Apollo Management LP [APOLO.UL] agreed to buy all shares in the rights issue that are not taken by existing shareholders.

Apollo could end up owning a stake of up to 29 percent, just under the threshold of 30 percent that by German law would force it to make a takeover offer for the entire company.

Infineon, which has been buffeted by a slump in global chip prices, said it would use the proceeds to repay debt and strengthen its liquidity position.

Its shares gained 2.1 percent to 2.635 euros by 0921 GMT, outperforming a firmer German technology index .TECDAX.

Five-year credit default swaps on Infineon tightened by about 100 basis points to 525 basis points, a trader said, having been as wide as 755 basis points earlier this week.

CDS are over-the-counter contracts that protect investors against defaults on corporate bonds over a given time period.

Commerzbank analyst Thomas Becker said recent positive news flow from Infineon had paved the way for a capital increase and a buy-in by Apollo but the size was a surprise.

"We calculated a financial gap of 100 million euros to 400 million euros," Becker said in a research note.

"We believe that Apollo has pushed hard to grab a significant stake and that Infineon was keen on getting a new strategic shareholder on board."

However, Becker said Apollo's agenda was unclear but that the U.S investment firm "will do the utmost to remove Infineon's valuation discount of 50 percent to market multiples", possibly leading to a sale of Infineon's wireless unit or "to complete asset stripping".