UPDATE 1-Union given three days to propose new bid for Esmark

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NEW YORK, June 24 (Reuters) - Steelmaker Esmark Inc ESMK.O said on Tuesday an arbitrator had set aside a bid for the company from India's Essar Steel, ruling that Esmark had not given the United Steelworkers (USW) sufficient notice before signing an agreement with the Indian company.

Esmark is the target of a bidding war between Essar and Russia's OAO Severstal (CHMF.MM).

Essar initially bid $17 a share and said it will raise its offer to $19 a share, after a competing $17 a share bid was placed by Severstal. The union currently backs the Severstal bid.

The arbitrator's decision gives the USW until Thursday, June 26 to come up with a competing offer for Esmark, failing which Essar could revive its earlier bid, which Esmark's board had already approved.

The USW has threatened to block a deal with Essar, as the union currently has the right to come up with an alternative deal in the event of a takeover of Esmark.

Franklin Mutual Advisers, which owns about 60 percent of Esmark's shares also initially announced that it would back Severstal's bid, due to the USW's opposition to the Essar bid.

However, Franklin Mutual has not yet commented on Essar's offer to sweeten its bid to $19 a share. (Reporting by Euan Rocha; Editing by Kim Coghill)