VW, which bought Rolls-Royce Motor Cars a week ago for pounds 430m, said it had signed a letter of intent to acquire Lamborghini from its controlling shareholder, the youngest son of the former Indonesian leader President Suharto.
The purchase is being handled through the VW subsidiary Audi, which is also buying the racing engine specialist Cosworth from Vickers.
No price was disclosed and Audi said the negotiations were likely to take several weeks, but analysts suggested Lamborghini would fetch between pounds 30m and pounds 70m.
The Bologna-based Lamborghini made only 220 of its Diablo range of high- performance coupes and open-top cars last year but has ambitions to raise production to as many as 3,000. Earlier this year, it said it was looking for a European car maker to become its partner in making a Baby Diablo that would sell for about pounds 65,000, or half the price of its biggest-selling Diablo SV. The top-of-the-range Diablo Roadster sells for pounds 186,500, accelerates from 0-60 in under four seconds and has a top speed of 208mph.
Lamborghini is 60 per cent owned by companies controlled by Hutomo Mandala Putra, better known as Tommy, the youngest son of former Indonesian President Suharto. MyCom Berhad, a Malaysian financial company, controls 40 per cent.
"From a purely economic point of view, it's questionable whether it makes sense,'' said Juergen Pieper, car analyst with Deutsche Morgan Grenfell. "But it's a small price to pay to improve Audi's image and prestige.
Tommy Suharto's interest in the company began in December 1993, when other companies in his control acquired the US car maker Chrysler's majority stake in Lamborghini.
A group of banks and financial investors, including General Electric Capital Corporation and Texas Pacific Group, and a buyout fund that controls the Ducati motorcycle group, were also interested in Lamborghini.
Audi said it saw the purchase as a "long-term investment" and would operate Lamborghini as a wholly-owned foreign subsidiary.