UPDATE 2-Germany's Merck starts arbitration against ImClone

(Adds comment from Merck, background, rewrites throughout)

By Toni Clarke

BOSTON, Sept 26 (Reuters) - Germany's Merck KGaA (MRCG.DE) has begun arbitration proceedings against its U.S. biotech partner ImClone Systems Inc IMCL.O, claiming it shouldn't have to pay ImClone for rights to a patent related to their cancer drug Erbitux.

Phyllis Carter, a spokeswoman for Merck, said the company, which markets Erbitux outside North America and pays ImClone a royalty on sales, said that a settlement agreement reached last December between ImClone, Yeda Research and Development Co Ltd, and drugmaker Sanofi-Aventis (SASY.PA), means Merck does not owe ImClone any royalties on the patent, known as the Yeda patent.

ImClone was not immediately available for comment, but said in a regulatory filing with the U.S. Securities and Exchange Commission that it does not believe that the settlement with Yeda alters Merck's obligation to pay ImClone a royalty reimbursement on the patent and will vigorously defend itself against Merck's claims.

Carter said Merck is claiming more than $18 million in damages from ImClone. ImClone, in its filing, said that according to a letter it received from Merck's lawyers, Merck is asserting a claim of about $10.4 million as well as other unspecified damages.

ImClone markets Erbitux in the United States with Bristol-Myers Squibb Co (BMY.N), which is seeking to acquire the 83 percent of ImClone it does not already own for $62 a share.

Carl Icahn, the billionaire investor and chairman of ImClone, has called the offer "absurd" and says a third party has offered to acquire ImClone for $70 subject to due diligence expected to be completed by the end of the week. Merck's relationship with ImClone would continue on the same terms if Bristol-Myers or another company acquires ImClone, Carter said.

Under the Dec. 7 agreement, ImClone and Sanofi agreed to each pay Yeda $60 million to resolve claims and counterclaims in the matter. (Editing by Brian Moss)