(Corrects date in second paragraph to March 1 from March 31)

Starbucks Corp cannot use market share losses in the grocery coffee aisle as grounds for ending a 12-year-old distribution partnership with Kraft Foods Inc, a Kraft attorney said on Friday.

Starbucks has charged that Kraft's alleged neglect and mismanagement of the business -- which brings in about $500 million in annual sales -- amounted to a breach of contract.

The world's biggest coffee chain wants to end the partnership on March 1 and replace Kraft with privately held Acosta Inc.

Kraft, which disputes any breach, on December 6 asked for an injunction in U.S. District Court in New York. A hearing on the injunction has been set for January 27.

In its last court filing before that hearing, Kraft on Friday said market share is not a measure of performance in the contract governing Kraft's handling of Starbucks' bagged coffee sales in supermarkets and other stores in the United States, Canada, Britain and other countries.

We dispute its relevance. It's hypothetical. That has no bearing on the question of whether they have the right to terminate and walk away for nothing on their own time table, Marc Firestone, Kraft's general counsel, told Reuters.

North America's top packaged food maker has argued that Starbucks' planned actions would cause irreparable harm to both Kraft and its customers unless the injunction was issued by the end of January.

Kraft wants to maintain the deal's status quo while the two sides hammer out an exit agreement with an arbitrator.

Starbucks in November announced its plan to split with Kraft.

It has charged that Kraft's missteps caused its market share in the premium grocery coffee segment to fall to just over one-quarter in 2009 from nearly one-third in 2005 -- which resulted in $100 million less in grocery coffee sales in 2010.

Kraft, which defends its market share performance, has said that sales related to the deal grew from $50 million in 1998 to a record of more than $500 million in 2010.

Declining market share is clear evidence of Kraft's failure to perform its basic obligations under the agreement, Starbucks spokesman Alan Hilowitz said on Friday.

It's disappointing but not surprising that Kraft would congratulate itself for ever-diminishing returns, he said.

Kraft already has turned down a $750 million offer from Starbucks to end the deal. It says the coffee chain must pay it the fair market value of the business, plus a premium of as much as 35 percent.

Some analysts have estimated that Starbucks could have to pay up to $1.5 billion to exit.

The coffee chain could reduce or eliminate any payment for damages if it convinces an arbitrator that Kraft's actions resulted in a material breach.

The case is Kraft Foods Global Inc v. Starbucks Corp, U.S. District Court for the Southern District of New York No. 10-09085.

(Reporting by Lisa Baertlein; editing by Carol Bishopric)

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