* Terra says CF bid does not reflect sector outlook
* CF raised its offer earlier this month
* New Terra board members vote against CF
* Shares slip 2.6 percent in late-morning trading (Adds special dividend detail, analyst commentary; updates share price)
By Matt Daily and Ernest Scheyder
NEW YORK, Dec 14 (Reuters) - Fertilizer maker Terra Industries Inc TRA.N said on Monday a sweetened takeover offer from rival CF industries (CF.N) was unanimously rejected by Terra's board, including three newly elected members actively supported by CF.
"The board believes the market consensus is shifting to reflect the brighter near- and long-term prospects for the entire sector, and that the latest improvement to CF's bid does not fully reflect these brighter prospects," Terra said in a statement.
Earlier this month CF boosted its hostile bid for Terra to $29.25 per share in cash plus 0.1034 share of CF common stock, or nearly $4.6 billion, far higher than the $2.1 billion it originally proposed last January.
Terra said the average increase in the share prices of CF, Agrium and Terra in the period Nov. 1-Dec. 11 was 26 percent, far higher than the 7 percent gain in the Standard & Poor's 500 .SPX.
The sweetened offer came after Terra shareholders elected three new members supported by CF to the company's board last month.
Using a legal loophole found in Maryland law, Terra was able to increase the size of its board to 11 rather than eject its own three board members who had lost to CF's slate.
A Terra spokeswoman confirmed Monday that the three new board members whom CF actively supported -- John N. Lilly, David A. Wilson and Irving B. Yoskowitz -- voted against CF's latest offer.
CF itself has been trying to fend off a hostile takeover bid by Agrium Inc (AGU.TO).
The rejected offer presents a "major dilemma" for CF, as it looks to fend off Agrium, Dahlman Rose & Co. analyst Charles Neivert said.
CF's latest offer is a "reasonable one," Sterne Agee analyst Mark Connelly said.
However, CF "will have to think long and hard before going too much higher," he said.
CF has already increased its bid several times this year, and a company source has told Reuters: "We have emptied our pockets, and we are done."
Shares of Terra, which paid out a special $7.50 dividend last Friday, fell 93 cents, or 2.6 percent, to $34.37 in late-morning trading. (Reporting by Matt Daily and Ernest Scheyder, editing by Dave Zimmerman and John Wallace)