U.S. drugmaker Pfizer increased its offer for the UK's AstraZeneca on May 2 to £63 billion ($106 billion) but the proposal, which would create the world's biggest pharmaceuticals company, was rejected.

AstraZeneca's board said the sweetened offer undervalued the company "substantially" and was not an adequate basis on which to engage.

The stand-off triggered speculation that Pfizer could pursue a hostile takeover. Alternatively, the U.S. group could raise the offer again, observers said, not least because it wants to get the deal done before any possible change in U.S. tax rules that might prevent it moving its tax base to the UK.

Pfizer's latest proposal saw shareholders receiving, for each AstraZeneca share, 1.845 shares in the combined company and £15.98 in cash.

Commenting on the offer, AstraZeneca chairman Leif Johansson said the proposal "would dramatically dilute shareholders' exposure to our unique pipeline and would create risks around its delivery." He also highlighted the fact that the small cash component would leave investors exposed to the risks faced by the U.S. drugmaker in executing an ambitious mega-merger.

In an attempt to smooth relations with the UK government, which is worried about the country losing its research credentials to a foreign country, Pfizer CEO Ian Read has promised to complete a substantial new R&D center planned by AstraZeneca in Cambridge and retain a manufacturing plant in Macclesfield.

Read also said that 20% of the enlarged group's R&D workforce would be based in Britain. Pfizer's reputation in the island nation is under a cloud following a decision three years ago to shut most of its research work at a large R&D centre in Sandwich - where Viagra was invented - with the loss of nearly 2,000 jobs.

Any eventual deal will be studied by antitrust regulators around the world, including those in China, where scrutiny could be especially intense since Pfizer and AstraZeneca rank no. 1 and 2 among multinational suppliers of the country's prescription drug market.