MEXICO CITY, Oct 13 A group of Mexican investors sweetened its offer for airline Aeromexi

MEXICO CITY, Oct 13 (Reuters) A group of Mexican investors sweetened its offer for airline Aeromexico, the object of a bidding war, by offering warrants in additional to its original $160 million bid.

The warrants offered by the investor group, which includes Citigroup , would pay out 10 percent of the increased value in Aeromexico from when it is acquired until it is eventually floated in a stock market offer.

Thursday, Mexico's competition watchdog rejected a $200 million bid by rival airline Mexicana for government-controlled Aeromexico, which has more than $1 billion in debt and is hamstrung by high labor costs and competition from discount carriers.

Mexico's Saba family, one of the country's wealthiest, has offered $166 million.

Banamex, Citigroup's Mexican unit, said the warrants would trade on the stock market and pay out when Aeromexico is relisted, within no more than three years.

Banamex reiterated an earlier pledge by the group to quickly invest $240 million to improve Aeromexico, which would directly benefit warrant holders.

''Through these instruments, selling shareholders will have a stake in the company's increased value without making any payment or taking any risk,'' Banamex said.

The Mexican government is trying to sell its 62 percent stake in Aeromexico and its holding company, Consorcio Aeromexico. Aeromexico and Mexicana were brought under government control after they went bankrupt in the mid-1990s.

Mexico's airline industry has taken off in recent years as low-cost airlines such as Interjet and Volaris offer flights at prices almost as low as bus fares.

Despite the market's growth, Aeromexico, which has continued to charge traditional prices and is hampered by above-average wage contracts, has lost ground.

Reuters DKS VP0600