By Pamela Barbaglia and Ben Martin
LONDON, March 7 (Reuters) - Britain's GKN is inadvanced talks over a merger of its automotive unit with DanaIncorporated, a deal that would complicate Melrose'shostile bid for the FTSE 100 company, five sourcesfamiliar with the matter said.
An agreement for GKN's auto unit, known as Driveline, couldbe signed in about two weeks, four of the sources said.
If successful, the deal would make it harder for turnaroundspecialist Melrose to persuade GKN investors about the merits ofits 7 billion-pound hostile bid, three of the sources said, withone adding Melrose may drop its hostile pursuit.
Melrose did not immediately comment.
The turnaround firm has been trying to buy GKN sinceJanuary, when the engineering group rejected Melrose'sunsolicited offer and set out plans to split its business intwo.
Ohio-based Dana, a maker of axles and driveshafts, has hiredBarclays to carry out negotiations with GKN, two of the sourcessaid.
GKN said on March 2 a "combination" of its auto unit withDana could provide greater value to shareholders than itsinitial plan to break up the business.(Additional reporting by Greg Roumeliotis in New York, editingby Sinead Cruise)