Peugeot rose as much as 13 percent after Paris-based brokerage CM-CIC said the carmaker may be forced to dispose of its 57.4 percent Faurecia stake to raise between 1.2 billion euros ($1.6 billion) and 1.5 billion.

Both companies declined to comment.

Peugeot has already sold assets including its Gefco logistics arm and leased-back Paris headquarters as it struggles to reverse mounting losses by scrapping more than 10,000 domestic jobs and an assembly plant near the French capital.

The unconfirmed sale speculation pleased investors because a disposal would allow Peugeot to deconsolidate Faurecia's 1.6 billion-euro debt from its own 2.5 billion total, Credit Suisse analyst Erich Hauser said.

Selling Faurecia could nonetheless hurt Peugeot in the longer run, he said. Like Gefco, the parts business has consistently outperformed its parent.

"The market's reading this as positive because it would get rid of Faurecia's debt," Hauser said. "But Peugeot would just be trading future earnings for balance sheet repair."

Faurecia shares were up 8.1 percent at 13.70 euros as of 1055 GMT. Peugeot was 6 percent higher at 6.55 euros after giving up some of its earlier gains, which were partly driven by traders covering short positions.

The parts maker contributed 1.8 billion in cumulative earnings to Peugeot in 2006-2012, while the core auto division lost 1.2 billion, according to Credit Suisse data and estimates.

Peugeot may also have been buoyed by market rumours of an imminent government stake purchase, Credit Suisse said.

The carmaker faces a "serious crisis" and may need more action to ensure its recovery, French Finance Minister Pierre Moscovici said on Sunday.

"It will probably be necessary to go further," Moscovici said in a France Inter radio interview, without elaborating.

The government last month appointed a Peugeot board director and demanded the nomination of a staff representative in return for a 18.5 billion-euro debt rescue including up to 7 billion in state loan guarantees.

Peugeot is among the most shorted stocks in Europe, with 18 percent of the company's shares out on loan, according to Markit, a provider of trading data.

Hedge funds with negative bets on the stock are feeling the heat from the stock's 50 percent jump over the past month, prompting some of them buy back shares to cover their positions.

Center>Copyright Reuters, 2013