Palm Inc

shares jumped to their highest level in nearly two years on Tuesday, fueled by short covering and renewed speculation that the smartphone maker may be a takeover target.

Shares of Palm jumped to a session high of $17.50 on the Nasdaq, a gain of nearly 10 percent, helped by market talk that bigger rival Nokia was interested in Palm.

Representatives for both Nokia and Palm declined to comment on the rumors.

The merger chatter, along with anticipation of a successful secondary stock offering, may have sparked short sellers to cover positions, driving the stock higher, analysts said.

It could make sense, said analyst Shaw Wu of Kaufman Brothers, referring to the possibility of an acquisition by Nokia. The other thing that is powering Palm's stock is a short squeeze. The stock is pretty heavily shorted. Its probably a combination of both.

As of June 30, Palm's short interest was some 47.2 million shares, or about 33 percent of its outstanding stock and 17 percent above short interest in the middle of last month.

Palm has a high percentage of short-seller investors, who bet on a share price decline but move to cover themselves if they see signs that a stock will rise instead.

For years, Palm, a pioneer in handheld computers and multimedia phones, has been talked about as a potential takeover target. Its recent report on solid sales of its new Pre model and the introduction of a new handset -- the Pixi -- have proven encouraging, after months of speculation about product plans for its operating system, called webOS.

Potential suitors, analysts say, include rivals such as Motorola Inc and Nokia, and technology companies that may be eyeing the phone market, such as Dell Inc , Cisco Systems and Hewlett-Packard Co .

Palm would give Nokia a leg up in the North American market, where it has lagged, and perhaps bolster its smartphone strategy, analysts say. However, integration of the two companies would not be smooth.

From a technology point of view it would not add anything significant to Nokia, said Hannu Rauhala at Pohjola. They would be buying some clientele, but it's always better to win clients than to buy clients.

Palm may also be a risky move, since it has revamped its product lineup and executive offices, and lost money for more than two years. Perhaps more important, it is pricey -- analysts suggest it could command a price of more than $3 billion, even though its annual revenue is less than $1 billion.

Buying Palm doesn't guarantee success, said Shaw Wu. Everything has a price and at the right price it could make sense. But the last thing (they want) is overpaying for something that is far from a guarantee.

(Reporting by Franklin Paul, editing by Matthew Lewis)

Electronics