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RPT-UPDATE 1-EU puts action against Volkswagen law on hold

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BRUSSELS, Jan 27 (Reuters) - A European Commission decision on taking further legal action against a law which protects Volkswagen from hostile takeover has been postponed indefinitely, a spokesman said on Tuesday.

The fight over the law has pitted the EU executive against the German government, which has defended it as vital to protect jobs at Europe's largest carmaker.

"The Volkswagen case is postponed indefinitely so as to allow further contacts between the Commission and German authorities on a series of outstanding infringement cases," Commission spokesman Jonathan Todd told reporters.

The EU executive had been expected to decide on the law at its meeting on Wednesday. An EU source said the decision had been made in the light of the strong social impact of the case.

The head of the Commission, Romano Prodi, had himself expressed concerns over these issues. "The president of the European Commission, bearing in mind that the law is equal for everybody, has always paid great attention to all the non-macroeconomic consequences," the source said.

The source insisted the case had not been dropped completly. "The game is not over, we have only postponed a decision."

The Commission has already warned Germany once that the law breaches the EU's rules on the fundamental freedoms of movement of capital and investment.

It had been expected to launch a second phase of legal action, which involves a formal warning to Germany to change the law or face legal proceedings at the European Court of Justice, the EU's highest court.

The source said several of the non-German commissioners in the EU executive had also been in favour of taking the social consequences of action over the VW law into account.