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UPDATE 1-Coca-Cola boosts stake in Keurig to become biggest shareholder

(Adds comment from Coke statement, value of stake, background, shares)

May 13 (Reuters) - Coca-Cola Co has raised its stake in Keurig Green Mountain Inc to 16 percent from 10 percent, making it the largest shareholder of the maker of the popular Keurig one-cup coffee brewer.

Keurig's shares jumped 10 percent to $121.79 in morning trading on the Nasdaq. Coke's shares were up 0.9 percent at $41.20 on the New York Stock Exchange.

Coke now owns about 26 million shares of Keurig, up from 16.7 million as of Feb. 27, according to a regulatory filing. (http://link.reuters.com/qak39v)

Based on Keurig's Monday closing of $110.71, Coke's stake is worth about $2.9 billion.

"These incremental purchases demonstrate our continued belief that Keurig Green Mountain has substantial growth potential," Coke said in an emailed statement.

Coke and PepsiCo Inc have been struggling with declining soda sales in developed markets such as the United States as consumers become more health conscious.

Under a 10-year agreement announced in February, Coke and Keurig are developing a machine that will serve both carbonated and non-carbonated drinks.

Keurig's machines use pods filled with coffee, tea or hot chocolate powder to brew one-cup drinks at home.

Coke said in February it had bought a 10 percent stake in Keurig for $1.25 billion, with the option to raise its holding to a maximum of 16 percent through open market purchases.

Up to Monday's close, Keurig's shares had risen about 38 percent since Coke disclosed its initial stake.

Short interest in Keurig's shares had dropped to 8.7 percent as of April 30 from 22 percent at the end of January before the Coke deal was announced.

(Reporting by Maria Ajit Thomas in Bangalore; Editing by Saumyadeb Chakrabarty)