UPDATE 2-Legg CEO denies Peltz wants to dismember company

* Legg CEO says Peltz not pushing to carve up firm

* Fetting wants to avoid adversarial situation with Peltz

* Fetting calls Peltz and partners sharp business people (Adds details on investor flows)

By Svea Herbst-Bayliss

BOSTON, Nov 11 (Reuters) - Legg Mason Inc (LM.N) Chief Executive Mark Fetting on Wednesday denied speculation that hedge fund manager Nelson Peltz, the money manager's newest board member, might be pressing to carve up the firm.

Peltz, an activist investor known for demanding change at jeweler Tiffany & Co (TIF.N) and fast-food chain Wendy's/Arby's Group Inc (WEN.N), joined the Baltimore-based asset manager's board last month.

Since then, speculation has mounted that Peltz and his firm, Trian Fund Management, might urge Legg, which oversees roughly $700 billion and ranks as one of the world's biggest publicly traded money managers, to spin off its fixed-income business, Western Asset Management, or other units.

Western, which manages the bulk of Legg's assets, has performed better this year after previously suffering problems with structured investment vehicle debt.

Fetting, speaking at the Bank of America Merrill Lynch Banking and Financial Services conference, said neither Legg nor Peltz has expressed an interest in splitting off any of Legg's affiliate units.

"When you look at Trian their focus has always been on firms that have multibrands, and in our case we have multi-managers," Fetting said.

"We share a mission of improving margin and it is not an area of disagreement but rather about saying let's go make it happen." Fetting said he did not know where the speculation about selling a unit came from.

Peltz became the 14th member on Legg's board and has attended one meeting since being elected in October. "So far so good," Fetting said describing the meeting and conversations he has had with Peltz.

Fetting said Peltz and Legg agree that the company should work to improve its margins and vowed that he would personally keep a sharp eye on cutting costs in the months ahead.

Fetting also said that he is encouraged by new demand for the company's portfolios after months of outflows from stock and bond funds.

Legg reported outflows of $8 billion for the third quarter, far less than the outflows of $77 billion during the fourth quarter of 2008.

Its money market and other short-term funds took in $4 billion of new assets during the third quarter, marking their first positive flows in a year.