UPDATE 2-Allied Capital rejects Prospect's sweetened bid

* Allied says revised bid not superior to Ares deal

* Says remains committed to Ares proposal (Adds details, background, share movement)

Feb 3 (Reuters) - Allied Capital Corp ALD.N shot down a revised buyout offer from Prospect Capital Corp (PSEC.O) saying the offer was not superior to its deal with Ares Capital Corp (ARCC.O).

Although it was widely expected that Allied would thwart Prospect's higher bid citing various hindrances, the company's stock went down 4 percent.

Given a relatively smaller size of Prospect, Allied shareholders would have owned 53 percent of the combined company, making it a unique deal.

However, some analysts did raise concerns about Prospect's ability to maintain dividend if a merger happens.

Allied also said there was a gap between Prospect's earnings and dividend level and could result in a dividend cut while a combination with Ares may lead to resumption of dividend for Allied shareholders.

A dividend cut would reduce Prospect's stock price and there is a risk that the premium would even "vanish if the market believed that Prospect would be successful in completing the transaction," Allied said in a statement.

Last week, Prospect had declined to comment on the details of its offer.

Earlier, Prospect pointed out in a letter to Allied that unlike Ares, it has successfully merged with another publicly traded company, Patriot Capital, to dispel any doubt in its ability and resolve to complete this merger.

However, this very fact came to haunt Prospect.

Analysts and Allied are worried if Prospect, which is yet to complete the honeymoon period after Patriot deal, can pull off another big merger so soon.

Allied said it remains "strongly committed" to its Oct. 26 deal with Ares and recommended its shareholders vote for the merger.

Ares has agreed to buy Allied in an all-stock deal valued at $648 million. [ID:nBNG507417] [ID:nBNG534512]

Last week, Prospect sweetened its offer for rival Allied Capital by about to $903.5 million in stock and offered a 19 percent premium to Allied's Jan. 25 closing price. [ID:nSGE60P0CD]

"We learned that Prospect has yet to engage any financial advisors, a fact we find troubling given the transformative nature of this transaction," Allied said.

Prospect had said it would pursue all available options, including bringing the matter directly to Allied shareholders, if Allied board declines its offer.

Other business development companies are keenly looking at the outcome of the takeover tussle as the losing side may look at smaller players in the sector and debt-laden private-equity lender American Capital Ltd (ACAS.O) may be one of the choices.

Prospect shares were down 3 percent at $11.15 on Nasdaq, while Allied Capital shares were down 4 percent at $4.08 in afternoon trade Wednesday on the New York Stock Exchange. (Reporting by Supantha Mukherjee and Anurag Kotoky in Bangalore; Editing by Anne Pallivathuckal, Gopakumar Warrier)