(Rewrites confirmation, analysts, Commission)
By Clifford Coonan
BERLIN, June 20 (Reuters) - Germany told the European Union on Friday it was holding to its stance that a law protecting Europe's biggest carmaker Volkswagen from takeover is consistent with European Union law, the government said.
"We handed in the statement today. The government still holds the view that the VW law is compatible with EU law and does not restrict the free movement of capital," an economy ministry spokeswoman told a news conference, confirming what government sources told Reuters earlier.
European Internal Market Commissioner Frits Bolkestein has said certain provisions of the "VW law" restrict investment from other member states, violating EU treaty rules on the free movement of capital and the right of establishment.
Friday was the deadline for Germany to respond to steps against the controversial law taken by the European Commission, which polices competition policy throughout the EU.
The sources said the federal government agreed with the government of Lower Saxony, which holds around 20 percent of VW shares and says the law protects VW from a hostile takeover.
Chancellor Gerhard Schroeder has defended the law which gives Lower Saxony, where he used to be premier, a blocking minority by capping shareholder voting rights at 20 percent.
However, the head of VW's works council in April acknowledged he could imagine abolition of the law.
Volkswagen declined to comment on the statement. The European Commission said it would not rush into a decision on legal action in the case.
TAKEOVER CANDIDATE?
Analysts say the VW law is aimed at safeguarding more than 150,000 jobs in Europe's biggest economy and making sure VW does not come under foreign control.
EU treaty rules say capital should flow freely in the 15-nation bloc. The Commission is conducting a campaign against restrictions to cross-border investment to boost dwindling merger activity and raise competitiveness.
Although abolition of the VW Law could open the door to a bid for VW, few industry experts anticipate such a move, at least in the short term.
"The VW Law is largely a theoretical issue, no one is going to try a hostile bid for VW -- it just wouldn't happen," said one Germany-based banking source.
Amid very difficult conditions for the auto industry, few rivals are in a strong enough financial position to bid for VW, even if regulators sanctioned further consolidation.
Toyota Motor Corp is one of the few candidates, but there is no sign that the Japanese company would be interested.
One UK-based fund manager said: "The Commission is determined to do something about the VW Law and what it is about is dragging VW into the 21st century."
VW, battling with falling demand, an ageing model line up and unfavourable currency effects, is under pressure this year and does not expect to match last year's operating profit. Separately on Friday, the carmaker said it would halt production of its Golf model at its main Wolfsburg plant next week if strikes over the working week in eastern Germany continued.
The stock has slipped about six percent so far this year, underperforming the European sector .
"If the law goes it would spark some short-term upside because it would enable someone to take over VW," said a Germany-based fund manager. "It will be an issue for the next year or so but it is dragging on and in the end it is a political decision."
(Additional reporting by Madeline Chambers in Frankfurt and Lisa Jucca in Brussels)