UPDATE 2-Roche stands by dividend as Genentech talk swirls

* Roche falls 3 pct after report could raise Genentech bid

* Says no plans to change previous dividend policy

* Morgan Stanley sees Roche paying more than $100 a share

(Adds Genentech shares, updated Roche price, more comment)

By Katie Reid and Ben Hirschler

ZURICH/LONDON, Jan 12 (Reuters) - Swiss drugmaker Roche (ROG.VX) reaffirmed its dividend policy on Monday, dismissing talk it might sacrifice payouts to help fund a sweetened offer for the remainder of U.S. biotech giant Genentech DNA.N.

Roche will continuously increase its payout ratio over three years as stated in February 2008, a spokesman for the Basel-based group said.

Despite this, stock in Roche slipped 3 percent on worries over a Financial Times report late on Friday that it was ready to scrap its year-end dividend to pay for a higher offer for the 44 percent of Genentech its does not already own. [ID:nLC232278]

Roche declined to comment on any other details of the report, which said it was preparing to offer $95 per share after Genentech rejected an offer of $89/share in July.

"We are not surprised to hear that Roche eventually needs to sweeten its deal. We continue to believe that the current financial market crisis is of transient nature and that banks will need to return to their primary function, i.e. alimenting the economy with credit," said Vontobel analyst Andrew Weiss.

"Improved deal terms would mean Roche is still adamantly interested in buying Genentech and that it has most likely spoken to its banker with regard to the potential of raising cash in the debt market," Weiss said.

If it goes ahead, Roche's buyout of Genentech will be the biggest biotechnology deal ever. An improved $95 offer would value the rump of the U.S. biotechnology business not already in Roche's hands at around $47 billion.

Initially, shares in Genentech rose to a high of $99.05 after Roche made its first bid last July. But the credit crisis has since raised severe doubts about Roche's ability to secure the necessary $30 billion to $35 billion debt financing to conclude the deal.

As a result, Genentech shares have fallen back below the $89 level and after gaining following the FT report, they were near flat at $86.28 in late trade on Monday. Roche stock was down 2.8 percent at 167.10 Swiss francs.

MORE THAN $100 A SHARE?