(Reuters) - U.S. drugmaker Pfizer Inc increased its offer for AstraZeneca Plc to 63 billion pounds ($106 billion) on Friday, but the British company promptly rejected the proposal, which would create the world's biggest pharmaceuticals company.

AstraZeneca's board said the offer "substantially undervalues" the company and was not an adequate basis on which to engage with its suitor.

Industry analysts said that raised the possibility that Pfizer would now take the takeover plan, which would boost its pipeline of cancer drugs and create significant tax and cost savings, direct to AstraZeneca shareholders.

The U.S. group would much prefer an agreed deal, since hostile takeovers typically take longer, require a higher final price and carry more risks because the bidder cannot access the target's books to assess its business.

Friday's 50 pounds ($84.47) a share indicative offer follows AstraZeneca's decision to rebuff an earlier proposal that valued it at 58.8 billion pounds, or 46.61 pounds per share.

Some investors and analysts had expected that the sweetened offer would be enough to bring AstraZeneca's board to the negotiating table, even if it was not accepted, and the swift rejection suggests Pfizer may now go over the board's head.

"I think it's making it increasingly likely that Pfizer is going to come back with a hostile bid," said Mick Cooper, analyst at Edison Investment Research.

Leading investors have met with Pfizer Chief Executive Ian Read this week in London and many feel that an offer of 50 pounds or above is worth discussing.

"Given where the shares have come from, this doesn't look unreasonable," one top-10 investor in AstraZeneca said of the latest Pfizer offer.

AstraZeneca shares were trading at around 30 pounds a year ago, but confidence in the company's cancer drug pipeline has built up strongly since then.

"We expect Pfizer ultimately to have to sweeten its offer based on discussions we have had with investors, many citing a price within the 52-55 pounds range and some above this, and our analysis of the EPS accretion for Pfizer," said Mark Clark, an analyst at Deutsche Bank.

Investors had previously said they were looking for at least 50 pounds a share and also wanted more cash in the mix. The latest deal would offer 32 percent cash and 68 percent shares, little different from the 30-70 split offered originally.

Many analysts are convinced Pfizer will raise its offer again, not least because it wants to get the deal done before any possible change in U.S. tax rules that might prevent it moving its tax base to Britain.

Pfizer's latest proposal would have seen shareholders receiving, for each AstraZeneca share, 1.845 shares in the combined company and 15.98 pounds in cash.

Commenting on the offer, AstraZeneca Chairman Leif Johansson said: "Pfizer's proposal would dramatically dilute AstraZeneca shareholders' exposure to our unique pipeline and would create risks around its delivery."

He also highlighted the fact that the small cash component would leave investors exposed to the risks faced by Pfizer in executing an ambitious mega-merger.

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