* Vote due Sept. 20
* Transatlantic's largest holder already opposes
* Fate of three-way contest remains unclear (Rewrites)
Sept 12 (Reuters) - Reinsurer Allied World Assurance (AWH.N) said on Monday that an influential advisory firm had recommended its shareholders vote for a deal to buy peer Transatlantic Holdings Inc TRH.N, even though the same firm said Transatlantic shareholders should reject the offer.
The recommendations added to the three-month-old drama surrounding the deal, with Allied World and Transatlantic shareholders due to vote on Sept. 20.
As it stands, Allied's offer is the smallest of three outstanding bids for Transatlantic, whose largest shareholder has said it will vote against the merger. [ID:nN1E77N1TM]
Allied World said it was disappointed that the proxy advisory firm, Institutional Shareholder Services, had recommended Transatlantic's shareholders vote against the offer. Transatlantic said it too was disappointed.
Shares of Allied fell 0.5 percent to $51.66 in early trading, while Transatlantic fell 0.2 percent to $48.75.
At those prices the all-stock offer was worth $2.84 billion and stood at nearly a 7 percent discount to Transatlantic's share price, valuing it at roughly two-thirds of book value.
There are two richer offers on the table for Transatlantic that complicate the Allied deal. Validus Holdings's (VR.N) hostile cash-and-stock bid is worth $2.88 billion, while an all-cash unsolicited offer from Berkshire Hathaway Inc (BRKa.N) values Transatlantic at $3.25 billion.
Validus has taken its bid directly to shareholders, while Berkshire and Transatlantic have entered into a confidentiality agreement and opened talks on an offer. (Reporting by Ben Berkowitz in New York and Jochelle Mendonca in Bangalore; Editing by Sayantani Ghosh and Lisa Von Ahn)