UPDATE 2-Schaeffler wants to keep Continental shares

* Schaeffler says aims to keep Continental shares

* Paper says banks considering unwinding Conti takeover

* Continental shares up 4.1 percent
(Adds comments by German finance minister, FTD report on
chairman)

HANOVER, Germany, March 2 (Reuters) - Indebted German car
parts group Schaeffler dismissed speculation its takeover of
larger rival Continental AG (CONG.DE) could unravel under
pressure from creditor banks.

"The rumours that Schaeffler has agreed to give up its Conti
shares to the banks are untrue," a Schaeffler spokesman said on
Monday after the Frankfurter Allgemeine Zeitung newspaper
reported that such a move was under consideration.

Schaeffler has a direct stake of nearly 50 percent in
Continental and transferred another 40 percent stake to banks to
ensure it stays a minority shareholder under a deal it struck
last year to end a bitter takeover row.

Continental rose 4.1 percent to a close of 12.23 euros after
having reached an intraday high of 13.30 euros, while the German
mid-cap MDAX index .MDAXI closed 3.6 percent lower. M.M.
Warburg analyst Marc-Rene Tonn said if the deal came apart it
would be hard to find buyers for Continental given the
difficulty of arranging finance and anti-trust issues for
companies like Michelin (MICP.PA).

Still, creditor banks could find getting Continental shares
a more attractive proposition than control of Schaeffler via a
debt-for-equity swap.

Schaeffler has said it needs about 5 billion to 6 billion
euros ($6.3-7.6 billion) in capital and has said it was prepared
to sell a stake to outside investors to raise that sum while
asking the government for temporary financing support.

The Schaeffler family is now being pressured to surrender
control of its company to banks that financed the ill-fated
deal, sources with knowledge of the matter told Reuters.
[ID:nLO890399]

The premier of Continental's German home state of Lower
Saxony said in a newspaper interview the Schaeffler family
should cut its Continental stake to around 10 percent.
[ID:nL0397757]

Family-owned Schaeffler borrowed 16 billion euros to buy
control of Continental, but the credit crunch left it struggling
to service its debt.

German Finance Minister Peer Steinbrueck said the company
had to first do what it could on its own before hoping for
support from the government.

A collapse of Schaeffler would result in 25,000 jobs lost at
the company, with another 25,000 or so lost in the automotive
supplier industry, Steinbrueck told German television station
ARD on Monday.

Adding to Schaeffler's troubles, a German court has put the
brakes on Schaeffler appointing Rolf Koerfer as chairman of the
automotive supplier, replacing Hubertus von Gruenberg, Financial
Times Deutschland reported, citing a spokesman for the court.

The court's move comes in reaction to a complaint over a
possible conflict of interest and means that Koerfer will not
take part in a supervisory board meeting on Friday, the
newspaper cited the spokesman as saying in its Tuesday edition.
(Reporting by Arno Schuetze, Patricia Uhlig, Hakan Ersen and
Maria Sheahan; Editing by Dan Lalor and Matthew Lewis)
($1 = 0.7940 euro)