The London Stock Exchange (LSE) has rejected a surprise takeover approach from Nasdaq that values it at around $4.2 billion.

The LSE, which last month successfully fought off a takeover bid from Australia's Macquarie Bank Ltd at 580 pence per share last month, said in a statement that Nasdaq's conditional cash proposal of 950 pence a share was too low.

European exchanges have been circling each other in vain for over a year as the pressure intensifies from users to cut costs and lower fees in a single market. The LSE is viewed as a target partly because, unlike its main rivals, it has no derivatives platform.

The LSE said the proposal represented only an 8 per cent premium to its current share price and "undervalues the company, its unique position and the very significant synergies that would be achievable from the combination of London Stock Exchange with any major exchange group".

Shareholder Scottish Widows, which owns 7.3 per cent of the LSE, said the Nasdaq offer was "closer to our value" for the exchange than previous offers.

A Nasdaq spokeswoman said: "We have seen the (LSE) announcement and will make our announcement in due course." Shares in the LSE had earlier closed at 880p. Yesterday's bid values the LSE at 28 times projected 2006 earnings of 33.6 pence a share.

This is more expensive than pan-European exchange Euronext,which is trading at 26 times earnings and Deutsche Börse which is trading at about 22 times, also according to Reuters data.

Nasdaq shares jumped nearly 7 per cent to as high as $42.45. "From Nasdaq's perspective it's probably good timing to come in with an offer now while NYSE is early in being listed and still getting to grips with the Archipelago merger," said Andrew Mitchell, analyst at Fox-Pitt, Kelton.

The LSE also said it intended to continue with its plan to return £510 million to shareholders, which is subject to approval by its shareholders at a meeting on April 19th.

A source familiar with the situation said the LSE plans no further defensive moves in the absence of a firm offer from Nasdaq. Euronext and Börse have both made takeover approaches to the LSE since late 2004.

Yet a rise of more than 80 per cent in the LSE's share price over the last 12 months and disquiet among their investors at the risk of overpaying for the London exchange have led them to consider merging with each other instead.

"Macquarie bidding at 580 pence was not something really credible but this offer certainly is," said an analyst at one French bank. "You can expect the combined Nasdaq-LSE entity to massive reduce costs because they might eventually have only one trading platform and you are really adding two businesses which are not competing with each other," the analyst said.

"If the Nasdaq is successful with its bid, then this will put even more pressure on Deutsche Börse and Euronext to come together," the analyst added.Euronext declined to comment on the situation, as did Deutsche Börse. - (Reuters)