Cameco Corp said on Monday it is backing out of a bidding war for Hathor , after Anglo-Australian miner Rio Tinto sweetened its bid for the Canadian uranium explorer to C$654 million (406.7 million pounds).

After careful consideration we cannot justify increasing the price beyond our current offer and accordingly, we will let our offer lapse, said Tim Gitzel, chief executive of Cameco, Canada's largest uranium miner.

Allowing the bid to lapse won't set back Cameco's plan to double annual uranium production to 40 million pounds by 2018, Gitzel said in a statement.

Cameco and Rio have been locked in a battle to acquire Hathor, which controls the large exploration-stage Roughrider project in the uranium-rich Athabasca region of Saskatchewan in Western Canada. Both companies see demand for uranium growing despite the pressure on the nuclear industry in the aftermath of the Fukushima disaster in Japan.

The Roughrider project is located just 25 km (15 miles) southeast of Cameco's Rabbit Lake mill and has the potential to produce at least 5 million pounds of uranium a year.

Cameco made a hostile C$520 million bid for Hathor in August, after talks aimed at a friendly deal fell apart over price. Rio emerged as Hathor's white knight in October with a C$578 million bid.

Earlier this month, Cameco raised its bid to C$625 million, but Rio was quick to counter with a C$4.70 a share bid worth C$654 million, leading many analysts to speculate that Cameco would back-out of the race, as the price was already more than 25 percent higher than its original bid.

Investors though were betting that the bidding war would continue and shares of Hathor closed well above Rio's offer price at C$5.05 a share on Friday.

Gitzel said Cameco plans to focus on developing its existing assets and it remains on track to meet its objectives.

We will continue to explore other growth opportunities, but only where there is a clear benefit to our shareholders, he added.

(Reporting by Euan Rocha; Editing by Frank McGurty)