The battle for ownership of Capital Re is not over yet, despite the company signing up to a sweetened deal with ACE.

Insurance giants ACE and XL Capital have been trying to out-bid each other in an attempt to gain control of the specialist bond reinsurer.

Cap Re said on Tuesday night it agreed to ACE's sweetened $14 a share, or $511 million, cash and stock takeover offer instead of a similar all-cash offer from ACE's now arch rival XL Capital.

New York-based Cap Re announced it plans to call a special meeting of its stockholders to vote on the revised merger agreement with ACE as soon as possible.

But XL are expected once again to enter the game and place a higher bid, which will in turn, force the hand of ACE to either up its offer of pull out of the race.

Wall Street analysts said they believe XL could raise its bid yet again if it still wants Cap Re.

Cap Re agrees to ACE deal "XL probably has more flexibility in terms of its ability to make another offer,'' said Matthew Veto, an analyst at Salomon Smith Barney.

"I wouldn't be surprised to see them come back with another bid.'' Merrill Lynch analyst Jay Cohen agreed. "The company has historically been fairly conservative on most financial matters, so it may limit their appetite,'' he said.

"But it does appear they have some room should they choose to pursue it more aggressively.'' The terms of the deal call for Cap Re shareholders to swap each of their shares for 0.65 shares of ACE plus $1.30 a share or enough cash to bring the value of the bid to $14 a share, but not more than $4.68 a share.

ACE shares rose by 19 cents and Cap Re by 50 cents after the announcement. XL stock also rose 50 cents.

ACE sweetened its bid to match XL's $14 a share all-cash bid late on Monday after a Delaware court denied an injunction sought by ACE to block negotiations between Cap Re and XL Capital.

ACE originally agreed to buy Cap Re in June in a deal in which Cap Re shareholders would swap their shares for 0.60 shares of ACE. That deal originally valued Cap Re at about $18.90 a share, or $606 million.

But ACE's original offer lost about half its value, dropping to just $10.54 a share, or about $385 million, based on ACE's closing price on Tuesday after a drop in the share price.

XL then muscled in earlier this month by offering $12.50 a share cash and then bumping up the bid to $13 a share cash, creating a bidding war which has seen Cap Re's shares soar.

ACE has twice raised its offers to match XL's bids.

Cap Re said the principal terms of the "no-solicitation'' provisions of the new deal, including the opportunities for the Board to consider other offers, subject to certain conditions, and the $25 million break-up fee, are identical to the original agreement.