FRANKFURT- Deutsche Boerse will cut the weighting of Volkswagen shares in the blue-chip German DAX index after a surge in the carmaker's shares that briefly made it the world's most valuable company.

Volkswagen shares nearly doubled on Tuesday, rising above 1,000 euros at one point.

That gave Volkswagen a market value of 296 billion euros ($376 billion), surpassing U.S. oil firm Exxon Mobil Corp and increased its weighting in the 30 member-DAX index to a hefty 27 percent.

In a statement late on Tuesday, Deutsche Boerse ? the operator of the Frankfurt stock exchange ? said it would cap Volkswagen's weighting in the DAX index to 10 percent, starting next Monday.

"By capping Volkswagen AG the weightings of all other DAX constituents will be changed as well," it said, adding that it would use closing prices on the electronic Xetra trading system on Friday as a basis for its recalculation.

The stock exchange operator's decision "should give some relief to short sellers in Volkswagen and is mainly positive for the DAX index," said a Frankfurt-based trader.

Volkswagen's share surge had been prompted by news that Porsche Automobil Holding SE had raised its stake in the German maker of Passat family cars and other mass-market models, triggering a massive squeeze on short-sellers.

Shares of Morgan Stanley, Goldman Sachs Group Inc and France's Societe Generale tumbled on Tuesday on speculation they were caught in the squeeze.

The U.S. banks later recovered all their losses and closed higher, amid a broad U.S. stock market rally.

BIG SQUEEZE

Porsche on Sunday said it had accumulated indirect control of 74.1 percent of Volkswagen, and planned to raise its stake in the world's third-largest automaker to 75 percent in 2009.

The increased stake would leave less than 6 percent of Volkswagen's shares still floating in the market.

Dealers said traders who had sold borrowed Volkswagen shares, hoping to buy them back at lower prices, had panicked at Porsche's announcement and raced to close their positions.

Tuesday's surge in Volkswagen's shares had helped the DAX index to close 11.3 percent higher. Without the "Volkswagen effect", the index would have closed down around 3.7 percent.

Volkswagen shares were indicated down more than 40 percent early on Wednesday ahead of the market opening at 0800 GMT. The DAX index was indicated to open largely unchanged.

Index provider Stoxx Ltd. also said it would cut the weighting of Volkswagen shares in its main indices and cut Volkswagen's free float factor to 0.3732 from 0.4963.

"This decision reflects the changes in the shareholder structure of Volkswagen and results in a lower weighting of Volkswagen in the respective indexes," Stoxx said.

(Reporting by Knut Engelmann and Christoph Steitz; Editing by Jason Neely)