* U.S. fund drops bid to raise stake in Sapporo
* cites brewer's worsening financial, operational performance
* fund has no plans to sell existing Sapporo stake - source
* fund to vote against Sapporo board re-election (Adds details)
By Taiga Uranaka and Junko Fujita
TOKYO, Feb 17 (Reuters) - U.S. fund Steel Partners withdrew a $548 million bid to raise its stake in Japanese brewer Sapporo Holdings (2501.T) to a third, citing the beer maker's deteriorating earnings.
Steel Partners, which owns 18.6 percent of Japan's fourth-biggest brewer and has sizeable holdings in at least two dozen other Japanese companies, last year offered to increase its stake in Sapporo to 33.3 percent for 875 yen per share.
The market had seen little chance of success for the bid, worth 50.6 billion yen ($548 million), with Sapporo's shares closing down 9.7 percent at 381 yen ahead of the announcement on Tuesday, less than half the Steel Partners offer price. "It's not a surprise at all. Steel has been unloading stakes in other firms," said Tokushi Yamasaki, a food sector analyst at Daiwa Institute of Research.
"Rather, attention would be on what will happen to its (existing) stake. If Steel decides to sell, would it be sold in the market or to someone, including Sapporo's rival breweries?" he said.
Steel Partners has no intention to sell its existing Sapporo stake as it sees potential in the brewer's real estate business, said a person familiar with the situation. Sapporo's property business contributes nearly half of total profits.
Sapporo, trying to boost value in the real estate business, agreed in 2007 to sell a 15 percent stake in Yebisu Garden Place, an office and shopping complex in central Tokyo, to Morgan Stanley (MS.N) for 50 billion yen.
The maker of Yebisu premium beer said last week its 2008 operating profit rose 18.8 percent to 14.7 billion yen, with a sharp cut in marketing spending helping offset weak sales and more expensive raw materials.
Steel Partners said in a statement it was withdrawing its offer due to Sapporo's "ever-worsening financial and operational performance and continued refusal to negotiate the terms of an acceptable offer to shareholders".
Sapporo said it was "very regrettable" that there had been "one-sided criticism of management and untrue or misleading contents" in a letter it received from Steel Partners.
Steel Partners said it would vote against the re-election of Sapporo board members at a shareholder meeting next month.
Last May, the fund helped oust the president and most of the board at Aderans Holdings Co 8170.T, a Japanese wig maker, marking the first time that management of a Japanese company had been ejected under pressure from an activist fund.
A recent survey of public filings by Reuters showed Steel Partners sold about 150 billion yen worth of Japanese shares over the past year, cutting its holding to about 240 billion yen as of last month. [ID:nT245057] ($1=92.37 Yen) (Additional reporting by Nathan Layne) (Editing by Ian Geoghegan & Michael Watson)