FRANKFURT (Reuters) -- Porsche Automobil Holding SE halted attempts to take over partner Volkswagen AG and instead agreed to explore a merger with Europe's biggest automaker.

The deal would represent a setback because Porsche is abandoning its goal of trying to dominate Volkswagen by building a 75 percent stake. It now owns about 51 percent of VW.

Details of the merger remain unclear, but Volkswagen and Porsche said on Wednesday they had agreed on a blueprint to create an "integrated car manufacturing group" within four weeks.

Under the new group, "10 brands shall stand below an integrative leading company," Porsche said in a statement. Until now VW and Porsche have been run independently with separate management.

Volkswagen has been in charge of nine brands -- Volkswagen, Lamborghini, Skoda, Bentley, Bugatti, Audi, Scania, Seat and Volkswagen Commercial Vehicles. Porsche Automobil Holding has run the sportscar brand independently.

The proposed merger follows a wave of consolidation in the auto industry, which has been hit by the global economic crisis. It has forced car groups such as Chrysler LLC and General Motors' Opel to seek new owners.

VW welcomes plan

Porsche's existing shareholders would fund a capital increase of up to 5 billion euros ($6.7 billion) for the new company in 2009 or 2010, a person familiar with the matter said. Selling a stake to an outsider is not currently on the agenda, the person said.

The agreement to revamp Porsche's takeover follows a day of discussions among the families who control Porsche Automobil Holding SE, the Piech and Porsche clans.

They had gathered in Salzburg, Austria, to discuss how to cut a 9 billion euro debt mountain built up by Porsche to fund its bid for VW.

On Wednesday, Porsche said that following discussions on forging closer ties between the two companies, it aims to "develop a corresponding basis for decision-making on the future structure of the common group." Volkswagen welcomed the move.

The shape of a new company will be discussed by a VW-Porsche working group including the German state of Lower Saxony -- where VW is headquartered -- as well as worker representatives.

Lower Saxony's premier Christian Wulff said he is ready to enter talks about the future of Volkswagen.

Lower Saxony holds a 20 percent stake in VW, which allows it a veto on strategic decisions.