* 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 could clinch a merger of its automotive business with Dana Incorporated within two weeks, four sources close to the matter told Reuters, complicating Melrose's hostile bid for the FTSE 100 engineering group.
The proposed 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 that Melrose could drop its pursuit.
Melrose declined to comment.
GKN rejected an unsolicited takeover offer from Melrose in January 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. Barclays declined to comment.
GKN said on March 2 that a "combination" of its Driveline business with Dana could provide greater value to shareholders than its initial plan to break up the business.
Driveline has Fiat Chrysler and Volkswagen among it customers and posted revenue of 5.3 billion pounds ($7.35 billion) last year, up 15 percent on 2016, while trading profit rose by 14 percent to 377 million pounds.
One of the sources said that Dana was determined to clinch control of the business and would do a better job than Melrose in developing operational benefits.
Dana aims to use its own stock to finance the bulk of the transaction, which one source said could be a possible stumbling block because its shares have lost 19 percent of their value since the start of the year.
Fears that U.S. President Donald Trump will start a trade war could push the stock down further, the source said.
GKN is scheduled to hold a presentation for analysts and investors on its automotive business on March 8, though a deal with Dana is unlikely to be announced this week, the sources said.
A sale of Driveline would see GKN, a mainstay of the British engineering sector, focus on its aerospace division, which supplies components for the Black Hawk helicopter and Eurofighter Typhoon.
Melrose has made only one offer for GKN and has not yet sweetened the terms to encourage shareholders to accept a deal.
In an attempt to quell political criticism, Melrose boss Simon Peckham this week told British lawmakers on parliament's Business, Energy and Industrial Strategy (BEIS) Committee that it would consider making binding commitments about the future of GKN and would not seek to offload any of its units to a buyer who could be deemed inappropriate.
Melrose shareholders are due to vote on its takeover plan at a meeting on March 8. ($1 = 0.7214 pounds)
Additional reporting by Greg Roumeliotis in New York Editing by Sinead Cruise and David Goodman