UPDATE 3-EU panel blocks Merck KGaA's Erbitux in lung cancer

* European drug panel CHMP rejects Merck's appeal

* Negative opinion on use in lung cancer

* Merck KGaA shares close down 2.4 pct (Adds analyst comment, paragraphs 10-11)

By Ludwig Burger and Frank Siebelt

FRANKFURT, Nov 19 (Reuters) - An influential European expert panel on drug approvals again rejected outright Merck KGaA's (MRCG.DE: 行情) cancer drug Erbitux for use against lung cancer, the company said on Thursday.

Merck has dropped the drug's development programme for lung cancer, a spokesman told Reuters.

Merck had harboured hopes that it would at least win a recommendation for a subgroup of lung cancer patients in its appeal against a negative opinion in July by the Committee for Medicinal Products for Human Use (CHMP), whose assessments generally guide European Union drug approvals. [ID:nL3494257]

Lung tumours are the most common form of cancer worldwide.

Erbitux, seen by Merck as a potential blockbuster with more than 1 billion euros ($1.5 billion) in peak annual sales even without lung cancer revenue, is already approved for use against cancer of the bowel and of the head and neck.

The company is working on further uses of the drug in bowel cancer and against gastric cancer.

Merck had been trying to persuade the CHMP to reconsider its rejection, which came despite promising results in a late-stage trial that drew nods of approval from researchers.

The shares closed down 2.4 percent at 65.56 euros, while the European DJ Stoxx Health Care Index dipped 0.8 percent.

"This is very bad news for Merck and puts immense pressure on the shares," a German equity trader said.

Andrew Baum, an analyst with Morgan Stanley who rates the stock "underweight," said the setback limited growth opportunities for the drug at a time when Erbitux was already facing growing competition.

The likely approval of Amgen's (AMGN.O: 行情) Vectibix in first- and second-line metastatic bowel cancer in 2010 was set to hit Erbitux's market share and erode prices, he said in a research note.

Merck's initial application had been for use of Erbitux injections in combination with standard chemotherapy to combat non-small cell lung cancer (NSCLC), the most common form of lung tumours, that had started spreading.

Bristol-Myers Squibb (BMY.N: 行情) and Eli Lilly & Co (LLY.N: 行情) hold the rights to Erbitux in the United States and Canada and they pursue separate clinical studies and approval procedures. ($1=.6722 Euro) (Reporting by Ludwig Burger and Frank Siebelt; Additional reporting by Christoph Steitz and Ben Hirschler in Washington; Editing by Jon Loades-Carter and Richard Chang)