* UK-based CSR says it is considering options
* CSR has attractive niche in Internet of Things
* Microchip has until Sept. 25 to make firm offer
* CSR shares leap 36 percent (Adds Microchip response)
By Paul Sandle
LONDON, Aug 28 (Reuters) - Britain's CSR has rebuffed an approach from Microchip Technology, saying that the undisclosed price proposed by Microchip was not enough if its U.S. rival wants to bolster its role in the "Internet of Things" with the chipmaker's radio technology.
"The price proposed by Microchip has been rejected and the board is considering its options for the company," CSR said in a short statement on Thursday.
Shares of CSR, which had fallen 9 percent in the year to date, closed up 36 percent to 780 pence, valuing the company at 1.3 billion pounds ($2.2 billion).
CSR, short for Cambridge Silicon Radio, specialises in connectivity. Its chips are used in products such as speaker docks and Apple-owned Beats headphones.
It recently developed smarter Bluetooth technology that connects multiple devices in the home, enabling people to control lighting and heating using a smartphone, an example of the "Internet of Things".
CSR's role in the developing sector makes it an attractive target for larger chipmakers that are seeing fewer opportunities for growth in smartphones.
Microchip, which makes memory and analogue chips, confirmed in a statement late Thursday that it has held talks with CSR.
"The discussions between the parties are at a very preliminary stage and there can be no certainty that an offer will be made," Microchip said.
Analysts said that a purchase of CSR could cost Microchip nearly 10 times the $328.5 million that it agreed to pay to buy Taiwanese wireless product maker ISSC Technologies Corp in May.
Alex Jarvis at Peel Hunt, the top-rated analyst covering the stock, said CSR was one of her key picks as a takeover target.
"Firstly, it's about large vendors finding profit centres outside handsets, and secondly it's about part of the convergence towards Internet of Things, focusing on big areas like home entertainment and automation, and that trend happening in automotive as well," she said.
CSR's chief executive, Joep van Beurden, has been shifting the company's focus to more profitable areas such as music, audio and automotive, with less reliance on products like digital cameras.
He sold CSR's mobile phone technology business, where it was losing ground to rivals like Qualcomm, to Samsung Electronics Co two years ago for $310 million.
Jarvis said the turnaround has put CSR in a relatively strong position, and its favourable UK tax rate also made it an attractive target for U.S. companies.
CSR issued the statement after the Financial Times, in a report on its website, said the company was talking to a potential suitor about a deal that could value it at about $3 billion.
Jarvis said a price of around 11 pounds a share, valuing the company at about $3 billion, would be "not out of kilter".
Under British takeover rules, Microchip has until Sept. 25 to either announce a firm offer for CSR or walk away.
Microchip's shares closed up 0.8 percent at $48.02 on the Nasdaq.
J.P. Morgan Cazenove is advising CSR.
($1 = 0.6030 British Pounds) (Additional reporting by Karen Rebelo; Editing by Neil Maidment, Tom Pfeiffer and Leslie Adler)