* Deal expected in about two weeks -sources
* Merger would complicate Melrose's hostile bid for GKN(Recasts lead, adds context)
By Pamela Barbaglia and Ben Martin
LONDON, March 7 (Reuters) - Britain's GKN couldclinch a merger of its automotive business with DanaIncorporated within two weeks, four sources close to thematter told Reuters, complicating Melrose's hostile bidfor the FTSE 100 engineering group.
The proposed 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 that Melrose could drop its pursuit.
Melrose declined to comment.
GKN rejected an unsolicited takeover offer from Melrose inJanuary and set out plans to split its business in two.
Ohio-based Dana, a maker of axles and driveshafts, has hiredBarclays to carry out negotiations with GKN, two of thesources said. Barclays declined to comment.
GKN said on March 2 that a "combination" of its Drivelinebusiness with Dana could provide greater value to shareholdersthan its initial plan to break up the business.
Driveline has Fiat Chrysler and Volkswagenamong it customers and posted revenue of 5.3 billionpounds ($7.35 billion) last year, up 15 percent on 2016, whiletrading profit rose by 14 percent to 377 million pounds.
One of the sources said that Dana was determined to clinchcontrol of the business and would do a better job than Melrosein developing operational benefits.
Dana aims to use its own stock to finance the bulk of thetransaction, which one source said could be a possible stumblingblock because its shares have lost 19 percent of their valuesince the start of the year.
Fears that U.S. President Donald Trump will start a tradewar could push the stock down further, the sourcesaid.
GKN is scheduled to hold a presentation for analysts andinvestors on its automotive business on March 8, though a dealwith Dana is unlikely to be announced this week, the sourcessaid.
A sale of Driveline would see GKN, a mainstay of the Britishengineering sector, focus on its aerospace division, whichsupplies components for the Black Hawk helicopter andEurofighter Typhoon.
Melrose has made only one offer for GKN and has not yetsweetened the terms to encourage shareholders to accept a deal.
In an attempt to quell political criticism, Melrose bossSimon Peckham this week told British lawmakers on parliament'sBusiness, Energy and Industrial Strategy (BEIS) Committee thatit would consider making binding commitments about the future ofGKN and would not seek to offload any of its units to a buyerwho could be deemed inappropriate.
Melrose shareholders are due to vote on its takeover plan ata meeting on March 8.($1 = 0.7214 pounds)
(Additional reporting by Greg Roumeliotis in New YorkEditing by Sinead Cruise and David Goodman)