By Christiaan Hetzner

BERLIN (Reuters) - Germany looked set to win victory over the European Commission to preserve state influence at carmaker Volkswagen on Wednesday, after an adviser to the EU's highest court rejected the European Commission's bid to overturn the so-called VW Law.

While the final ruling is not expected until later this year, the preliminary advisory decision is a painful setback for the Commission. For years it has been locked in a battle with Germany over the 1960 law that gives the state of Lower Saxony a veto over fundamental decisions at VW such as mergers and acquisitions, even though it only has a 20 percent voting stake.

"The Commission has embarrassed itself on an issue that has practically no relevance. This looks to be a clear victory for Germany," said NordLB analyst Frank Schwope.

Brussels dragged Berlin in front of the European Court of Justice (ECJ) for a second time in 2011, demanding that the last surviving element of the VW Law be repealed - that any shareholder with 20 percent or more of the ordinary voting shares can veto major decisions about the company's future.

But on Wednesday the ECJ's Advocate General, Nils Wahl, said in a written opinion that the judges should dismiss the Commission's demand that Germany be fined for failing to repeal the veto right following an ECJ court ruling in 2007.

That ruling had decided that the combined effect of the 20 percent blocking power in conjunction with a separate 20 percent cap on individual voting rights had violated EU laws, but did not explicitly rule on whether the veto alone was illegal.

Wahl said Germany had thus fully complied with the ECB's 2007 judgment by eliminating the voting cap and Lower Saxony's right to directly appoint two delegates to the company's board.

"The Advocate General further points out that the purpose of the present proceedings is not to determine whether the provision on the blocking minority, considered on its own, infringes EU law, but only whether Germany has complied with the 2007 judgment," the ECJ said in a statement.

Under German corporate law the veto right is usually set at 25 percent but it can be lower. In the case of VW, however, it implicitly granted a blocking minority to Lower Saxony, home to five of the six western German VW manufacturing plants.

Lower Saxony applauded Wednesday's preliminary ruling as "groundbreaking", while VW union leader Bernd Osterloh described it as "a good day for the workers of Volkswagen".

A spokeswoman for Internal Markets commissioner Michel Barnier said Brussels believes Germany still hasn't fully complied and awaits the court's final judgment.

ECJ judges are expected to rule on the case in the next few months. Wahl's opinion is not binding, though the judges follow such recommendations in a majority of cases.

Even if the ECJ were to rule in favor of the Commission, removing the supermajority would have few implications for Volkswagen, long protected from a hostile takeover by the 1960 law.

Nearly 90 percent of VW's voting stock, the ordinary shares , are in the hands of three strategic shareholders - Porsche , Lower Saxony and the Gulf state of Qatar. Most outside investors hold only an economic interest in VW through the more liquid preference shares .

($1=0.7779 euros)

(Additional reporting by Brussels newsroom; Editing by Greg Mahlich)

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