UPDATE 2-TCI sees $2.2 bln potential CSX productivity gains

(Adds CSX response, detail, background, stock price)

NEW YORK May 20 (Reuters) - Investor group The Children's Investment Fund said in a letter to CSX Corp (CSX.N) shareholders on Tuesday that the U.S. railroad could achieve $2.2 billion in annual productivity gains within five years, far more than the $400 million the company has targeted.

The $2.2 billion in improvements could be achieved by improving scheduling and yard operations, higher speeds, longer trains and quicker loading, cutting engine maintenance costs, and by boosting fuel consumption and labor productivity, the London-based fund said in presentation materials.

TCI, which is trying to get five directors onto the 12-member CSX board, said that it, along with 3G Capital and the board nominees, collectively own 8.7 percent of CSX's outstanding stock.

Including swap contracts, the investment equates to a stake of 12.3 percent, the London-based fund said.

The hedge fund and 3G Capital are urging the election of its board nominees at CSX's shareholder meeting on June 25.

The investors said in the letter that no incumbent directors or senior CSX executives have bought CSX stock in the open market with their own money in recent years, and that executives have actually been reducing exposure to CSX shares.

In a response e-mailed to Reuters, Jacksonville, Florida-based CSX said it has held several meetings with TCI and is responsive to constructive ideas from shareholders.

"However, the TCI Group has offered an endless stream of ill-conceived suggestions -- including an LBO at $50 per share and a 'junk' recapitalization -- which, if implemented, we believe would be damaging to the company and would deprive shareholders of significant value," CSX said.

Last week, CSX said its board was unanimously opposed to the agenda put forward by TCI, saying the $15 billion hedge fund's ideas were based on "flawed assumptions and half truths."

The latest salvos come ahead of a trial on Wednesday in an escalating legal battle that experts have said would likely be resolved before the annual shareholders meeting.

Last month, TCI accused the rail company of a litany of securities law violations including illegally enriching its directors.

It accused CSX of awarding stock grants to senior executives a week before announcing a $1 billion increase in its stock repurchase plan, a dividend increase, and optimistic earnings forecasts.

On March 17, CSX sued TCI in New York federal court, alleging that it violated securities laws requiring disclosure of its stockholding agreements and intentions in the proxy fight.

TCI has denied the charges, contending it had made all the required disclosures.

CSX shares were up 1.14 percent at $67.71 in late morning trading on the New York Stock Exchange. (Reporting by Nick Zieminski, editing by Gerald E. McCormick and Ted Kerr)