Hedge fund billionaire John Paulson raised his firm's stake in Cadbury on Wednesday and now holds 2.54 percent of the British confectioner, the subject of a hostile bid by U.S. food group Kraft.

Paulson became the industry's highest-paid manager in 2007 by betting that U.S. house prices would fall. His firm Paulson & Co now holds 34.9 million shares in Cadbury, a British regulatory filing showed on Wednesday.

On Tuesday, Paulson doubled the stake in Cadbury to 2.08 percent, buying 14.8 million shares.

Kraft on Monday took its $16.2 billion offer straight to shareholders, refusing to sweeten its bid price, and setting the stage for a takeover battle that could take months.

At current values, Kraft's cash-and-share offer is worth 720 pence per Cadbury share, well below the British group's share price of around 763 pence.

(Reporting by Douwe Miedema)