The proposed merger between Apollo Tyres Ltd of India and the much larger Cooper Tire & Rubber, would create the world's seventh-largest tyre maker by revenue.
But the transaction has become bogged down in labour problems embroiling Cooper's US and Chinese operations, lack of financial information about the US firm's Chinese venture and a worsening performance by Cooper's US tyre business.
The merger agreement, signed in June, is valid up to December 31 after which Apollo can drop the deal.
"The stock rose on the assumption that the company will walk away from the Cooper deal which will be a big positive for it," Kishor Ostwal, managing director at Mumbai's CNI Research, told The Press Trust of India.
Neither side has said they are giving up on the merger.
But Mumbai's Ambit Capital brokerage said in an investors' note that if the acquisition falls through, "this could be significantly positive for Apollo shareholders".
Shares of Apollo Tyres climbed 7.95 percent to 100.90 rupees on the Bombay Stock Exchange on Tuesday.
Cooper Tire shares were down 1.18 percent at $21.75 in New York in pre-market trade on Tuesday -- far below Apollo's offer in June of $35 per share.
Apollo shares have surged 25 percent in seven trading sessions since it announced the US Delaware Supreme Court had ruled in its favour in its legal wrangle with Cooper Tire.
The takeover bid would be India's biggest for a US company and had been seen as another sign of growing Indian interest in overseas acquisitions.
But the deal landed in US court over charges by the US firm that its Indian suitor was delaying the transaction to wrestle down the offer price and was suffering from "buyer's remorse".
Apollo denied the allegations but conceded it would be tough at the initial offer price to find lenders to finance the deal due to Cooper's problems.
Apollo insisted last week "it continues to believe in the merits" of the transaction. If a deal is clinched before the December 31 deadline, it would likely involve a significant cut in the offer price, analysts say.
But in a sign it may be giving up on the transaction, Cooper said on December 20 it "intends to pursue this case as an action for damages".
Indian analysts were unhappy about Apollo's bid, saying it was paying too much for the US company and would be overloaded with debt.
Analysts have compared the proposed acquisition to a minnow swallowing a whale. Apollo had annual revenue of $2.5 billion in 2012 while Cooper's revenue totalled $4.2 billion.