UPDATE 2-GKN says hostile bidder Melrose's debt plan could hit pension scheme

(Updates with fresh statement from Melrose)

LONDON, Jan 29 (Reuters) - GKN issued a new salvo on Monday against a hostile bid by Melrose by warning that raising the company's debt ratio could reduce the strength of its covenants and therefore increase the cash needed to fund its pension.

The British engineering group, traces its roots back to the 18th century, has been trying to fend off a 7.49 billion pound ($10.54 billion) hostile approach from Melrose.

GKN said the strength of its covenant was critical to its investment strategy and the amount it paid into its schemes, and it said it was assessed at the "high end of good" during its last triennial valuation.

It said had stated it would increase GKN's leverage to 2.5 times core earnings, materially higher than the leverage level of 0.6 times in mid-2017.

"This may have implications for the covenant strength of the company, the level of the technical provisions deficit and therefore the level of immediate and/or long term cash funding requirements," GKN said.

GKN's pension trustees said this month that any potential buyer of the company should be aware of its billion pound-plus pension deficit.

Melrose said on Monday it was "surprised" GKN had not disclosed that the turnaround specialist had offered to make a voluntary cash contribution of as much as 150 million pounds to GKN's pension schemes when it first contacted the bid target about a takeover on Jan. 8.

The industrial turnaround specialist said GKN's pensions announcement "contained nothing that should cause concern to GKN pensioners, as Melrose has a long track record of responsibly funding pension schemes."

($1 0.7109 pounds)

(Reporting by Paul Sandle in London and additional reporting by Noor Zainab Hussain and Ben Martin; Editing by Kate Holton and Edmund Blair)