Volkswagen and Porsche are planning to merge in a bizarre twist that effectively ends the sports car manufacturer's hopes of a takeover of its larger cousin.

Commentators were left speechless earlier this year when Porsche announced plans to buy a huge stake in VW, despite its relatively small size.

But the deal ran into trouble as Porsche -- which is 15 times smaller than VW -- ran short of the billions it needed to fund the ambitious takeover.

Worse still, the failed coup left the famous German sports car company more than £8 billion in the red.

Although profits from sports car sales are enough to pay the interest, the company isn't making enough to pay back its borrowings.

And the failure has left Porsche vulnerable to a takeover itself. In March the German government had had to step in to prevent bankruptcy proceedings against the group.

VW's boss Ferdinand Piech, who seemed to have been out-manoeuvred by Porsche chief Wendelin Wiedeking, has now seized his chance and laid out a plan that will enable the famous racing name to survive -- albeit as part of an expanded Volkswagen empire.

Under the plan Porsche will become part of a larger group encompassing no less than ten different brands, including VW, Seat, Audi, Skoda, Bentley and Bugatti.

Although Porsche officials said the company's independence was guaranteed, privately they accept that it can no longer be a minnow in a large pond.

Last night Porsche formally asked the German government for a $2.5 billion loan.