Stick it Ferdi! Wolfgang Porsche decries a merger bid he decries as "blackmail," from cousin and VW Chairman Ferdinand Piech.

The tug-of-war between German auto giant, Volkswagen, and the acclaimed sports carmaker, Porsche, continues to heat up, as an heir to the Porsche fortune ignores a merger deadline and accuses his rivals of “blackmail.”

In a battle that has taken some serpentine twists, in recent weeks, the larger automaker first rejected a merger bid that would have put Porsche in the driver’s seat, then laid out an ultimatum of its own, VW demanding a 49% stake in the smaller company, and giving Porsche only until today to respond.

Company officials are confirming that the Stuttgart-based sports car manufacturer today rejected the counter-offer, leaving a variety of possible alternatives as the two makers – both started by the Porsche family – move forward in what is, in many ways, an internecine rivalry.

“Ultimatums don’t belong in the 21st Century,” Wolfgang Porsche, chairman of the company best known for its sports car operations, told The Financial Times, over the weekend, adding that, “We won’t be blackmailed.”VW Chairman and Porsche heir Ferdinand Piech rejected a merger initiative and has countered with one of his own.

The Stuttgart manufacturer set the battle in motion, last year, when it began accumulating shares of its cross-country rival.  A month ago, it appeared that Porsche might have gained the upper hand, and would press a merger that would put it in control.  But David didn’t count on Goliath’s ammunition and allies, notably German laws designed to protect VW from a hostile takeover.  After initially agreeing to sit down and discuss a deal, Volkswagen officials decided to back out.

That was bad news for Porsche, which has run up nearly $13 billion in debt since it began what some see as Quixote-esque bid.  Complicating matters, the global economic meltdown has hit hard sales of such iconic products as the 911 sports car and the Cayenne SUV.

“It’s not a price problem.  It’s social perception,” Detlev von Platen, CEO of Porsche Cars North America, recently told TheDetroitBureau.com, adding that “If you’re (an entrepreneur or senior executive) laying off people in your company, it’s hard to justify driving a 911 sports car.”

Normally one of the most profitable car brands in the world, the recession-wracked sports car business is a plum target for the other side of the Porsche family.  So, following the collapse of the Porsche-driven merger bid, VW Chairman Ferdinand Piech – who also happens to be Wolfgang Porsche’s cousin – countered by offering to buy the sports car part of Porsche Automobil Holding SE.  (The company has other, smaller operations, including engineering and design consultancies.)

That was also rejected, and Piech, last week, came back with a revised offer for 49% of the sports car business.

With that bid turned down, as well, it remains to be seen whether the two makers will step up their battle.  According to an estimate by a Porsche spokesman, VW would need to raise at least $15 billion to push through a 49% acquisition, a lot of money for even Europe’s largest automaker in the current economic climate.  The German publication, Der Spiegel, however, put the value at less than $5.6 billion.

But barring yet another twist that would lead to its victory, Porsche now has to consider what to do with its own costly stake – and the debt it has resulted in.  One possibility under consideration is to sell more than 20% of its VW options to a Qatari investment firm, which could wind up Volkswagen’s biggest shareholder.

About the only certainty, for the moment, is that the two sibling automakers are unlikely to simply walk away from the battle.