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FRANKFURT (Reuters) -- German car parts group Continental rejected an unsolicited takeover bid by Schaeffler on Wednesday, but said an agreement with its smaller rival would be "desirable."

A supervisory board meeting authorized management to explore defense measures, which one person familiar with the matter said included a possible capital increase or quickly striking a deal with a white knight.

"The supervisory board has today approved the pursuit of the options of action identified by the executive board," Continental said in a statement, adding that management "will continue to act in the best interest of the company and all of its stakeholders".

Schaeffler Group said it welcomes Continental's readiness to enter negotiations.

"The Schaeffler Group welcomes (the statement) that the management board and the supervisory board of Continental AG considers it as desirable to reach an agreement with the Schaeffler Group," the statement said.

"The Schaeffler Group now expects that Continental AG will provide concrete details on what it has in mind so that the Schaeffler Group can comment on it," it added.

Schaeffler has made a bid of 11.3 billion euros ($17.78 billion) in cash for Continental's shares, explaining that it does not necessarily want a majority stake so long as it owns at least 30 percent.

It has secured access to over a third of the shares via cash-settled swap contracts.

But should Schaeffler be willing to negotiate either on the price or the extent of control, the Continental board approved direct talks with the family-owned bearings maker.

"The executive board and the supervisory board are at the same time of the opinion that an agreement with Schaeffler Group is desirable," Continental said in the statement.

It will continue to legally review the offer, it added.

Board member Hartmut Meine of the IG Metall trade union demanded that Schaeffler guarantee in writing that it will not lift a finger against staff, existing wage agreements, organized labor's participatory management through the German system of co-determination, or the corporate structure.

"Oral declarations of intention from the responsible members of the Schaeffler Group are not sufficient. Contracts whose observance can be verified are necessary," the union said.

Earlier, Volkswagen's chief financial officer told a conference call he favored a solution to the conflict as swiftly as possible but said the carmaker would also not favor breaking up Continental since it could risk disrupting VW.

"We are currently supporting a few pretty strategic projects and we would be of course not at all pleased if any of these projects would be lacking support by any of the management teams," Hans Dieter Poetsch said.

Volkswagen is the largest customer of both auto parts firms.

Thomson Financial contributed to this report