Schaeffler urges Continental chairman to resign

* Schaeffler urges Continental chairman to step down

* Continental rift with biggest shareholder breaks into open

* Shares up more than 4 percent

(Adds quotes, background, share price)

HAMBURG, Germany, Jan 20 (Reuters) - Germany's family-owned ball bearings maker, Schaeffler, urged automotive supplier Continental AG's chairman to step down immediately as a boardroom row erupted publicly on Tuesday.

A Schaeffler spokesman said Hubertus von Gruenberg -- supervisory board chairman of the company in which Schaeffler has a nearly 50 percent stake -- had hindered solutions to problems confronting the two groups.

"As long as the supervisory board lets its chairman have his own way and he does not step down, we have the right to replace all 10 shareholder representatives on the board," the spokesman told Reuters.

He said this would not violate a deal with Continental -- struck after a bitter takeover battle -- that stipulates Schaeffler limit its stake to just under half until 2012 and to send up to four Schaeffler executives to the board.

Continental declined to comment on Schaeffler's demand for Gruenberg to resign.

Continental supervisory board Deputy Chairman Werner Bischoff -- also head of the IG BCE labour union -- earlier urged Schaeffler to abide by this agreement, saying this was the basis for its takeover of the car parts and tyre maker.

If the power struggle between the two companies does not end, labour representatives on Continental's board would have to consider other strategies, Bischoff said, without being specific.

Media reports said Schaeffler wanted to fill the board seats with candidates close to it as both sides squabbled over management and organisational issues linked with the merger.

Their problems were compounded by a deepening crisis in the car industry worldwide, and as Schaeffler grappled with the billions of euros in debt it amassed for its acquisition of Continental.

Continental is also laden with debt, but has been able to negotiate changes to covenants governing Continental's 11.8 billion euro syndicated credit line.

Its finance chief told Reuters last week it was planning a 1 billion euro capital increase.

By 1523 GMT, Continental shares were up 4.1 percent to 17.50 euros, while the DJ Stoxx European car sector index was down 1 percent.