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UPDATE 4-Inter Pipeline walks away from Pembina deal in favor of Brookfield bid

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(Adds Brookfield statement)

July 26 (Reuters) - Canadian pipeline operator Inter Pipeline on Monday decided against recommending a C$8.5 billion ($6.77 billion) deal with rival Pembina Pipeline Corp to shareholders and instead chose to pursue a higher bid from Brookfield Infrastructure Partners.

Following Inter's U-turn, Pembina terminated the deal, choosing to walk away with a C$350 million breakup fee, while Brookfield said it expected Inter to recommend its offer to shareholders.

The moves come after a five-month-long bitter bidding war between Brookfield, Inter and Pembina that has played out amid a rebound in oil prices and energy stocks after last year's historic pandemic-led downturn.

Brookfield said late on Monday it reiterates its offer to acquire Inter, adding that the company is the sole option available for Inter's shareholders.

Brookfield first made an unsolicited bid of about C$7.8 billion for Inter in February and eventually raised it to about C$8.58 billion in cash or stock this month, winning support from leading proxy advisers.

Under the infrastructure fund's revised offer, Inter shareholders can elect to receive either C$20 per share in cash or 0.25 of a share of Brookfield Infrastructure.

Inter had opposed previous Brookfield's bids, electing to go with Pembina at the start of June after a four-month long strategic review.

However, Brookfield's latest offer looked too good to refuse, with proxy advisors Institutional Shareholder Services and Glass Lewis highlighting a higher price and better chances of regulatory approval.

Inter said on Monday it will pay Pembina a termination fee of C$350 million and will make a formal recommendation on the Brookfield offer in "due course".

The company said its board is "open to engaging with Brookfield in an effort to reach a mutually agreeable transaction."

"While we are disappointed with this outcome, we will continue to seek opportunities for growth through focused acquisitions," Pembina Chief Executive Officer Mick Dilger said.

($1 = 1.2563 Canadian dollars) (Reporting by Arunima Kumar in Bengaluru; Additional reporting by Akriti Sharma; Editing by Sriraj Kalluvila, Arun Koyyur and Maju Samuel)