The state-owned CDC bank more than doubled its holding to 5.12 percent by purchasing Valeo shares in the market via its Bpifrance investment arm, according to a regulatory filing.

The stake increase "reflects Bpifrance's intention to invest in French companies with strong growth potential", a spokeswoman for the government investment fund said on Thursday.

Valeo declined to comment on the government move.

The stake hike comes amid expectations that more activists will set their sights on French companies. Demands by U.S. fund Elliott for governance and strategy changes at Pernod Ricard have fuelled those concerns.

Bpifrance Chief Executive Nicolas Dufourcq said on Tuesday the fund had 2 billion euros (£1.7 billion) available to fend off potential activist attacks on French firms.

Paris-based Valeo, whose products include fuel-efficient transmissions and autonomous driving sensors, is reining in investment after a series of profit warnings and weaker orders.

Valeo shares, which have fallen 51.4 percent over the past 12 months, ended 2 percent lower at 25.49 euros in Paris on Thursday.

Besides recent disruption to European auto production and slowing global demand, Valeo and its CEO Jacques Aschenbroich face increased scepticism over the short- to medium-term outlook for heavily automated cars.

Valeo was targeted in 2007 by hedge fund Pardus Capital Management, which pushed unsuccessfully for a tie-up with Visteon, a parts maker previously spun off by Ford.

Harris Associates, the New York activist that once ousted the Saatchi brothers from the ad agency bearing their name, increased its Valeo stake to 6.37 percent about a year ago. But the fund said on Thursday it backed the company's leadership.

"As long-term value investors we are fully supportive of the company and its management," Deputy Chairman and Chief Investment Officer David Herro told Reuters.

"Harris Associates has been a shareholder for several years and has always been very supportive of our group," a Valeo spokeswoman said.

(Reporting by Laurence Frost and Gilles Guillaume; editing by Richard Lough and Alexandra Hudson)

By Laurence Frost and Gilles Guillaume