UPDATE 1-Melrose makes 5-yr commitment to GKN's aerospace arm after government intervenes

government intervenes@ (Adds background)

LONDON, March 27 (Reuters) - Melrose on Tuesday committed to a five-year ownership of GKN's Aerospace division if it succeeds in its hostile bid for the engineering company after the British government made a rare intervention in the high-profile takeover battle.

Wading in to a corporate fight that has split investors, Business Minister Greg Clark wrote to Melrose to say the time had come for the turnaround specialist to prove that its hostile 7.9 billion pound ($11.17 billion) bid would not damage the country's defence capabilities or GKN itself.

Britain touts itself as having one of the most open economies in the world but it has toughened its takeover rules to force bidders to stick to the promises made during bid battles following a public backlash.

Clark said he intervened due to GKN's role at the heart of Britain's autos and aerospace industries and as a recipient of government-sponsored and defence-related contracts.

"In this case I am also mindful of the business model which Melrose operates and its history of acquiring, improving and selling businesses," he wrote.

"Whilst this approach can have an important and beneficial role to play, tensions could arise between this approach and the need for long-term investment and stability."

In response, Melrose said it would keep the Aerospace division of GKN for at least five years and would increase spending on apprentices and research and development by making an innovation centre near Oxford a global centre of excellence.

Melrose said it hoped this would reassure the government.

The new pledges from Melrose mark the latest twist in a takeover battle that has turned into a tit-for-tat spat with both sides talking up their offers as they seek to secure the backing of investors, customers, pension trustees, unions and government.

Investors have to choose between the Melrose deal and GKN's plan to merge its autos business with U.S. group Dana. They have until 1200 GMT on Thursday to decide.

Melrose Chief Executive Simon Peckham wrote in a reply to Clark that Melrose was focused on improving the good but underperforming businesses it acquires.

"We invest in R&D. We invest in our people, in skills and training. We boost productivity. It is partly through this investment that we make the operational improvements and productivity gains that are central to our strong track record."

HOSTILE MOVE

GKN, a mainstay of Britain's engineering sector, makes parts for the U.S. aviation industry, such as the Boeing 737 jet and Black Hawk helicopter, as well as components for Volkswagen and Ford cars.

The hostile Melrose bid has prompted criticism from politicians who are concerned that after improving GKN, Melrose could break it up and sell parts to foreign buyers.

Britain's right-leaning press have championed GKN's management, calling on the government to prevent "vultures" from buying a company that helped make Spitfire fighter aircraft in World War Two.

Melrose said in its response to Clark that it reserved the right to list the Aerospace division on the stock market and also said that were it to be approached by a buyer in the five year period, it would seek the approval of the government to sell.

It also said its commitment to spend at least 2.2 percent of sales on research and development should be seen as a "floor, not a ceiling on our ambitions".

In its defence against Melrose, the more than 250-year-old GKN has developed a plan to improve its operations, return cash to shareholders and merge its autos business with Dana to create a standalone company listed in London and the U.S..

On Monday, Dana increased the cash portion of its bid for GKN's Driveline auto business by $140 million.

Two of GKN's biggest investors are on opposing sides in the battle, with Elliott Advisors and its 3.8 percent interest backing Melrose, while Columbia Threadneedle with a 3.4 percent stake is backing GKN's plan.

($1 = 0.7074 pounds) (Reporting by Kate Holton; Editing by Alistair Smout and Jane Merriman)