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UPDATE 1-Dana ups cash offer by $140 million in hotly contested fight for Britain's GKN

Britain's GKN@ (Adds details, quote)

LONDON, March 26 (Reuters) - U.S. group Dana Inc agreed to increase its offer for GKN's Driveline business by $140 million in cash as it stepped up its efforts to fight off rival suitor Melrose.

In one of the most tightly fought corporate battles for years, shareholders have until March 29 to choose Melrose's offer for the whole company, or back GKN's plan to split off the group's auto business and combine it with Dana, leaving GKN focused on aerospace parts.

GKN said it would now receive $1.77 billion in cash after deducting $1.0 billion for the transfer of the pension deficit to the combined Dana-GKN Driveline group. It also plans to return up to 700 million pounds of cash to shareholders as soon as possible as part of an already announced 2.5 billion pound cash return programme.

"We believe that the true value of GKN is over 5 pounds per share and that Melrose's final offer fundamentally undervalues your company and should be rejected," Chairman Mike Turner said.

The Melrose offer values GKN at 462 pence per share in cash and shares.

In a separate statement, GKN management was forced to retract comments they had made in the Sunday newspapers, saying they thought shareholders would back their plan, after they said they had not been verified. (Reporting by Kate Holton; editing by Guy Faulconbridge)