U.S. chocolate maker Hershey Co is still working on a bid for Cadbury Plc that would top Kraft's hostile $17 billion takeover offer, a source familiar with the matter said on Wednesday.

Hershey authorized drawing up a bid for Cadbury and a formal offer could be made within two weeks, the Financial Times said, citing a person familiar with the matter. Hershey has until January 23 to make a bid under UK Takeover Panel rules.

But a source told Reuters that Hershey has not decided whether it will make a formal offer. Hershey officials declined comment.

The revived talk of a Hershey bid came as Kraft Chief Executive Irene Rosenfeld tried to woo Cadbury shareholders in London, paying visits to their offices.

Rosenfeld found some of those doors closed as a number of Cadbury shareholders declined to meet while Kraft sticks to an offer they think is too low.

It is highly possible that we will have some dialogue with Kraft if they come up with a higher offer next week, said one top 20 Cadbury investor who declined to meet with Rosenfeld. The investor was referring to expectations that Kraft would raise its bid by a January 19 deadline.

But the investor did not believe Kraft, or Cadbury, could divulge new information that was not already public.

Arguably we are still in the phony war phase now, the investor said. I think with all the time and money invested so far, Kraft is unlikely to walk away. There is scope to improve the offer.

Kraft declined to give details on Rosenfeld's itinerary.

Kraft has offered cash and stock worth 10.51 billion pounds ($17.12 billion), or 769.1p per Cadbury share. That is 2.6 percent below Cadbury's price on Wednesday.

Kraft shares closed down 0.2 percent following the reports on Hershey. Hershey shares fell 3 percent.

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For a graphic on the Cadbury price premium over Kraft's bid: http://graphics.thomsonreuters.com/0110/EZ_CBRY0110.gif

For Reuters Insider piece on arbitrage activity, please click: http://link.reuters.com/tat23h

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A WHITE CHOCOLATE KNIGHT?

Hershey has struggled to come up with financing for a deal to take on a company more than twice its size. Nestle and Ferrero, potential partners for a Hershey bid, also dropped out of the running in the last week.

According to the FT report, Hershey was discussing a plan to authorize banker Byron Trott to bring private equity investors into the deal and limit the amount of debt the company would take on.

Trott is a favorite adviser of Warren Buffett, whose Berkshire Hathaway is the largest single shareholder in Kraft.

Cadbury investors have until February 2 to respond to Kraft's offer. On Tuesday, the company offered its final defense against Kraft, delivering higher margins and promising a raised dividend.

Cadbury Chairman Roger Carr said on Tuesday he was amazed that Rosenfeld had taken so long to make a direct appeal to investors. He portrayed the Kraft offer as a choice between the excellent track record of Cadbury management and the unfulfilled promises of Rosenfeld's leadership.

Meanwhile, British Secretary of State for Business Peter Mandelson was expected to add his weight to union calls for Cadbury shareholders to resist Kraft.

Mandelson called a group of institutional investors to discuss their role in foreign takeovers of British businesses on Thursday, and Kraft's offer for Cadbury was expected to be at the top of his agenda. Institutional investors will be led by Keith Skeoch, chief executive of Standard Life Investments, one of Cadbury's biggest investors.

The Unite trade union said nearly 30,000 jobs were at risk if the debt-laden Kraft wins, and urged Cadbury investors to put the wider public interest ahead of price.

A Kraft spokeswoman said the assertions of potential massive layoffs were utterly unfounded.

($1.63-1 GBP)

(Additional reporting by Brad Dorfman, Raji Menon, David Jones and Martinne Geller; Editing by Michele Gershberg, Maureen Bavdek, John Wallace, Richard Chang and Robert MacMillan)

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