LONDON/CHICAGO (Reuters) - Kraft Foods Inc. chief Irene Rosenfeld refused to sweeten her $16.2 billion offer for candy maker Cadbury plc. and took the bid directly to shareholders on Monday, setting the stage for a takeover battle that could last up to three months.

North American food giant Kraft repeated yesterday the cash and shares terms of its original offer, which Cadbury rejected two months ago, and formalized the bid to meet a UK Takeover Panel deadline. The bid is now worth five percent less after a fall in Kraft shares.

Cadbury lost no time rejecting the hostile bid as a "derisory offer", as chairman Roger Carr termed it. Cadbury investors also said they would not countenance the offer without a substantial sweetener, to at least 800 pence per share from the current deal value of 709 pence per share.

"They need to raise the bid from here to be successful and they don't seem willing to do that," one top 10 investor in Cadbury told Reuters.

"If there is £8 plus on the table, it is going to be difficult for Cadbury shareholders to walk away from that."

A source familiar with the situation said this was not likely to be the final offer from Kraft, which was committed to making a case to shareholders after having given up on an endorsed offer from Cadbury's board.

"This just starts a new clock ticking. Today's announcement is just the beginning of a new phase," the source said.

Ms Rosenfeld has repeatedly insisted she will not overpay for Cadbury and has a history of sticking to her guns for Kraft. Cadbury's chief executive Todd Stitzer has said a link-up with Kraft made no strategic sense and that it has a strong future as an independent candy maker.

"We remain convinced of the strategic merits for both companies of combining Kraft and Cadbury," Ms Rosenfeld said in the formal offer statement.

Cadbury is the world's second-largest confectionery group, while Kraft is No.5, with brands such as Toblerone, Cote D'Or, Terry's and Suchard. Bringing them together would edge out privately owned Mars-Wrigley from the global No.1 spot.

Kraft now has 28 days to post its official offer document to Cadbury shareholders, which will then trigger the 60-day bid timetable under British takeover rules.

That would mean Kraft would know if it has won over Cadbury shareholders shortly before Valentine's Day.

Cadbury appeals to Kraft because confections are a higher margin, faster growth business than some of Kraft's packaged food lines such as cheese, as seen when Kraft reported disappointing quarterly revenue last week.

Cadbury, meanwhile, posted third-quarter sales last month that beat even the most bullish estimates. Cadbury would also help expand Kraft's business into faster-growing emerging markets such as India.

"Kraft's offer does not come remotely close to reflecting the true value of our company and involves the unattractive prospect of the absorption of Cadbury into a low-growth conglomerate business model," Cadbury's Mr. Carr said.

Kraft's deal proposal valued Cadbury shares at 717 pence based on the closing price of Kraft's shares on Friday, but was already down to 709 pence based on Kraft's trading yesterday.

When disclosed on September 7, the bid was at 745 pence per share.

Kraft also said yesterday that it secured a $9.2 billion bridge loan to help finance its bid for Cadbury, though the amount is higher than its initial cash offer and gives it room to raise that portion of the bid. Citigroup Global Markets Inc., Deutsche Bank Securities Inc. and HSBC Securities (USA) Inc. served a joint bookrunners.

Kraft shares were down about 1.3 percent at $26.42 in afternoon trading on the New York Stock Exchange. Cadbury's shares fell sharply to 739p after the unchanged bid terms were announced, but edged back up 0.4 percent to close at 761p.

In large part, Kraft's move showed it was betting that no counter-bidder would emerge for Cadbury after weeks of puncturing investor hopes for a much sweeter bid.

"They've got some negotiating power here and they are leveraging it pretty smartly," said Edward Jones analyst Matt Arnold.

Three potential suitors - Hershey Co., Nestle SA and PepsiCo Inc. - all have reasons to stay out of the fray.

PepsiCo, which owns snack-maker Frito-Lay, is in the midst of a $7.8 billion purchase of its two largest bottlers and might not be able to take on another deal right now.

Nestle has said it plans no big acquisitions. Hershey has been interested in a deal with Cadbury, but cannot afford it on its own, especially since the Hershey trust cannot give up control in the company.

But Kraft's decision to stick to its initial bid raised some questions about how much it wanted Cadbury and whether it risks losing the chocolate maker altogether.

"If they (Cadbury) have their next trading statement and things are looking positive, then you will have a situation where the Cadbury price might have moved away again from where Kraft are trying to pitch this," said Stephen Pope, chief market strategist at Cantor Fitzgerald.

Just going forward with the bid represents a financial commitment from Kraft.

The company said last week that the pursuit would cost it about two cents to three cents a share in the fourth quarter, or about $29.7 million to $44.6 million.

Kraft is offering Cadbury shareholders 300p in cash and 0.2589 new Kraft shares for each Cadbury share, unchanged from the September offer.

Lazard is acting as lead financial adviser to Kraft with Centerview Partners, Citigroup and Deutsche Bank also advising. Goldman Sachs, Morgan Stanley and UBS are working with Cadbury, banking sources said.