All eyes are back on Phelps Dodge in a complicated intercontinental bidding war over two Canadian nickel miners.

After Swiss-based Xstrata sweetened its hostile offer for Toronto's Falconbridge on Tuesday, investment managers said Phelps Dodge would have to consider whether to up its bid or walk away from a deal at a time when high metals prices are driving up profits and spurring consolidation in the sector.

But Phelps Dodge said its bid was still better than Xstrata's, based on current share prices.

Phelps is in a difficult position, as some shareholders are still upset that they are making acquisitions of companies with higher earnings multiples than their own, said Brian Hicks, co-manager of the global resources fund at U.S. Global Investors in San Antonio, Texas. Some shareholders want the company to buy back shares.

Arizona-based Phelps Dodge and Canada's Inco Ltd. have made a friendly offer for Falconbridge, and last month Phelps Dodge made a friendly $40 billion offer for both Inco and Falconbridge to create the world's largest nickel miner and largest publicly listed copper producer.

The three-way tie-up would let Inco trump Xstrata's bid. Inco, which has sweetened its bid twice, said the implied value of its offer is now C$61.65 per share, representing a premium of 4.5 percent over Xstrata's offer.

Xstrata raised its offer to C$59 per share in cash from C$52.50. The new offer expires on July 21 and values the 80 percent of Falconbridge it does not own at C$18.1 billion ($16.1 billion).

Phelps has the capacity to improve its offer, said Hicks. Phelps is essentially providing financial backing for Inco to raise the bid.

But Hicks, when told of Inco's announcement that it believes its offer represents the best alternative for Falconbridge shareholders, took that as an indication there would likely not be an increase on behalf of Inco.

The thing with a three-way merger is that it provides a pretty strong mining giant -- there are strong synergies with Falconbridge and Inco. That may give a slight edge to Phelps and Inco, he said.

Xstrata has a pretty strong financial interest, but strategically I tip my hand to Phelps/Inco.

Peter Schiff, president of broker-dealer Euro Pacific Capital in Darien, Connecticut, said it was essential for Phelps Dodge to be active in a wave of consolidation.

Falconbridge has got copper, nickel and zinc and these commodities are getting more valuable. It is a lot easier to buy reserves than to drill for them.

He warned that Phelps Dodge could not risk standing by as other big companies devour smaller ones -- and perhaps itself be devoured. They could eventually disappear as there's a lot more consolidation going on, said Schiff.

In a statement, Phelps Dodge said it was not surprised by Xstrata's increased bid for Falconbridge but said it believed the value of the Inco offer was superior to Xstrata's.

Importantly, Falconbridge shareholders will have the ability to participate in the upside resulting from the three-way combination through their ownership of almost 30 percent of the combined company, which is not the case with Xstrata's cash offer, Phelps Dodge said.

(Additional reporting by Rachelle Younglai in Toronto and Caroline Humer in New York)