LONDON, March 7 (Reuters) - Britain's GKN is in advanced talks over a merger of its automotive unit with Dana Incorporated, a deal that would complicate Melrose's hostile bid for the FTSE 100 company, five sources familiar with the matter said.
An agreement for GKN's auto unit, known as Driveline, could be signed in about two weeks, four of the sources said.
If successful, the deal would make it harder for turnaround specialist Melrose to persuade GKN investors about the merits of its 7 billion-pound hostile bid, three of the sources said, with one adding Melrose may drop its hostile pursuit.
Melrose did not immediately comment.
The turnaround firm has been trying to buy GKN since January, when the engineering group rejected Melrose's unsolicited offer and set out plans to split its business in two.
Ohio-based Dana, a maker of axles and driveshafts, has hired Barclays to carry out negotiations with GKN, two of the sources said.
GKN said on March 2 a "combination" of its auto unit with Dana could provide greater value to shareholders than its initial plan to break up the business. (Additional reporting by Greg Roumeliotis in New York, editing by Sinead Cruise)