Updates share move in paragraphs 3-4, adds details on Russian sites, Grizzly allegations in 12-14

By Enrico Sciacovelli

June 4 (Reuters) - Shares in Pirelli PIRC.MI recovered from steep early losses on Thursday after the Italian tyre maker rejected a short-seller report questioning whether it was earning more from its Russian operations than disclosed.

U.S.-based short-seller Grizzly Research said in a report on its website that it had taken a short position in Pirelli, alleging growth in the tyre maker's Russian business may be driven by demand linked to the war in Ukraine.

The stock fell as much as 13.4% at the Milan market open, hitting a one-year low, before briefly turning positive after Pirelli issued a denial. At 1155 GMT, the shares were down 0.8%.

"The content of the note from Grizzly Research does not reflect the truth," Pirelli said in a statement, adding it does not produce tyres intended for military use and had said so to Italian authorities.

The company added it had asked legal representatives "to take action in all jurisdictions against those who have spread this false information."

'SECURITY RISKS FOR THE WEST'

Short-sellers borrow stock in order to sell it, betting they can buy it back after it has fallen to make a profit.

Russian filings obtained by the Grizzly Research imply about 10% of Pirelli's net profit comes from operations in the country, the short-seller said in its report, which it also summarised in a series of posts on X.

As of March 31, Pirelli attributed less than 6% of its revenue to Russia, the Middle East, Africa and India combined, according to its May quarterly report.

Grizzly Research alleged a tyre dealership in occupied Ukraine was supplying Russian forces and that Pirelli's employees were aware of the buyer's identity and purpose.

"We are concerned that Pirelli's relationship with the Russian state may pose security risks for the West," it said.

In March 2022, following Russia's full-scale invasion of Ukraine, Pirelli said it opposed the war and halted investment in Russia, limiting operations to those needed to fund salaries and social services for employees.

Pirelli still runs two production plants in Russia, in Voronezh and Kirov, and none in Ukraine.

Grizzly Research said the Kirov site is located within an industrial complex that also hosts a Russian state-owned tyre producer, with the two sharing critical infrastructure.

"Through this proximity and its corporate ties to the Russian state, Russia could gain access to technology that is mission-critical for advanced military equipment," it said.