UPDATE: Dow, Rohm & Hass Confirm Talks About Merger, Suit

(Adds background and Dow comment on rating cut, updates stock prices)

Dow Chemical Co. (DOW) and Rohm & Haas Co. (ROH) confirmed Friday they are in discussions about their proposed $15.3 billion merger and the pending lawsuit related to the deal.

Shares of Dow, which have been pummeled in recent months on concerns about the company possibly being forced by court order to close the deal, were recently up 7% at $6.92. Rohm gained 16% to $62.54, getting the stock closer to Dow's $72 offer price. Dow's shares have lost more than half their value so far this year.

Dow and Rohm & Haas are locked in a court battle after Dow said in January it wouldn't close the acquisition on time. Dow has said it was still interested in completing the debt-fueled deal but that doing so now without firm long-term financing in place would put the combined company's future in question.

The trial is slated to start Monday, and the judge will rule on whether Dow should be forced to complete the deal, not its ability to finance it.

Dow slashed its quarterly dividend 64% to 15 cents a share last month, confirming market expectations that the company would need to do so amid the slump in chemical demand and would need to save money ahead of the deal.

Standard & Poor's Ratings Services cut its short-term ratings on Dow earlier Friday on higher potential for near-term weakness because of the takeover.

Dow later said it was encouraged that its talks with ratings agencies haven't resulted in any changes to its long-term corporate rating. The company added it is still focused on financial flexibility and maintaining its investment-grade rating. If those goals can't be accomplished, it said it would proceed with the trial.

The industry's woes and continuing credit crunch threw a wrench into Rohm & Haas' deal to be acquired by Dow, following the Kuwaiti government's withdrawal from a planned $17.4 billion joint venture with Dow. Dow was left with a $9 billion shortfall due to the joint venture's collapse.

Separately, Dow said it has reached an agreement with lenders that lowers the size of a term loan taken out to partially finance the purchase by $500 million to $12.5 billion.

-By Kerry E. Grace, Dow Jones Newswires; 201-938-5089; [e-mail]

   (Brian Kalish contributed to this story)