(Recasts story, adds comment, shares)
LONDON, Jan 15 (Reuters) - GKN faces pressure to open takeover talks with suitor Melrose Industries from U.S. activist investor Elliott, which disclosed a stake in the British engineering company just days after it rejected a 7 billion pound ($9.66 billion) bid.
Elliott, a hedge fund with a track record of intervening in takeovers, said on Monday that it holds a 1.7 percent interest in GKN through contracts-for-difference (CfDs).
It comes after FTSE 100-listed GKN spurned a 405 pence-a-share unsolicited paper-and-cash bid from Melrose on Jan. 12 on the grounds that it was "entirely opportunistic" and had "fundamentally" undervalued the aerospace and automotive parts supplier.
GKN, which has come under investor pressure to separate its divisions in recent months, has said it intends to split itself in two instead.
A person familiar with the situation said that while Elliott believed the current offer from industrial turnaround specialist Melrose was too low, GKN should open discussions with its suitor.
"They should definitely be talking to each other to find the right price and the right structure," said the person, who declined to be identified.
Melrose swooped on GKN after it was left vulnerable by two profit warnings in October and November, which were sparked by problems at its aerospace division and sent its shares sharply lower. The second profit alert led to the departure of chief executive-designate Kevin Cummings, meaning GKN was without a permanent CEO until Anne Stevens was appointed last week.
Elliott has been an investor in GKN "for a while" and believes the engineering group has underperformed its rivals, the person familiar with the situation said.
The U.S. fund also disclosed on Monday a 0.5 percent short position in Melrose shares via CfDs, which the person said was for hedging purposes.
Spokesmen for Elliott and GKN declined to comment.
Elliott, which has an office in London's upmarket Mayfair district, has become increasingly active in Britain.
It was among investment firms that forced Belgium-based brewer Anheuser-Busch InBev to raise its offer for rival beer business SABMiller in 2016, a $110 billion deal that was the UK's biggest corporate takeover.
The hedge fund disclosed its GKN stake on the same day that London-listed Melrose signalled its determination to push on with its takeover plan.
The turnaround specialist said on Monday that it had started to meet with GKN investors to discuss its bid, ramping up the pressure on the company.
"We are aiming to put into sharp focus the options for GKN shareholders," Melrose CEO Simon Peckham said in a statement.
GKN shares closed up 4.1 percent at 437.4 pence and Melrose stock finished 1.4 percent higher at 230.6 pence.
Shares in GKN have soared by 31.5 percent since it disclosed Melrose's approach.
($1 = 0.7248 pounds) (Reporting by Ben Martin; Editing by Jane Merriman and Gareth Jones)