By Jui Chakravorty Das

NRG also said that despite its current rejection, it was ready to do a deal under more favorable terms. Such a merger would create the largest U.S. power producer.

The offer "significantly undervalues NRG and is not in the best interests of NRG's shareholders," NRG said in a statement. "The board thoroughly reviewed Exelon's proposal and reached its decision after careful consideration with its independent financial and legal advisers."

Exelon unveiled its all-stock bid on October 19, offering to pay 0.485 Exelon share for each NRG share, equal to about $27.82 a share at current prices.

The offer, which came after NRG lost half its market value in two months, reflected a 37-percent premium over NRG's closing share price on the day before the bid was made public.

A combination of NRG and Exelon, which is the largest nuclear operator in the U.S., would create a company with market value of about $40 billion, and 47,000 megawatts of generating capacity.

NRG said the offer was too low because it would contribute 30 percent of the combined entity's cash flow and its shareholders would own only 17 percent of the equity.

In an interview with Reuters on Sunday, NRG Chief Executive David Crane called the exchange ratio "a lowball offer."

In a conversation with NRG on September 30, Exelon had discussed a price range "substantially above what they came forward with," Crane said.

"I have no problem with someone being opportunistic but that doesn't mean we have to hit the bid," he said.

In a letter to Exelon Chief Executive John Rowe, NRG's Crane and Chairman Howard Cosgrove cited a lack of secured financing as another reason for the rejection, posing "real risk of non-consummation to NRG's shareholders."

Additionally, NRG has $7 billion of debt that would have to be refinanced in the case of a takeover -- a difficult task for any company in this market and even harder for Exelon, whose credit rating was recently lowered.

The difficulty to refinance debt would make any such deal unlikely, Crane told Reuters.

STILL OPEN TO DEAL

But the company remains open to a deal at the right price.

"Please be assured that NRG is a believer in industry consolidation and has and always will be a willing seller or buyer when genuine value can be created for both parties," NRG said in the letter.

A sharp drop in energy stocks is expected to lead to more consolidation in the industry as utility companies seize the opportunity to add higher-growth assets at attractively low prices.

Investors have moved away from energy stocks, in part on worries that frozen credit markets could restrain growth at unregulated companies, particularly as some of them have very high debt burdens.

Shares of the largest independent power producers, which sell electricity to the grid at market rates, fell between 40 percent and 70 percent over the three-month period before Exelon made its unsolicited bid for NRG.

The credit crunch prompted Constellation Energy Group Inc , the largest U.S. power marketer, to accept a $4.7 billion cash offer from Warren Buffet's MidAmerican Energy Holdings Co in September.

The billionaire investor also recently said he had acquired an additional 3.2 million shares in NRG.

In fact, NRG itself made an unsuccessful $11 billion bid for competitor Calpine Corp in May.

But Crane said difficult debt conditions would likely prevent industry consolidation until the markets eased up.

NRG owns interests in 44 power plants totaling 23,000 megawatts of capacity in the U.S., including coal and natural gas units.

(Additional reporting by Matt Daily)

(Editing by Maureen Bavdek and Martin Golan)