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Aug 10 (Reuters) - Canadian Pacific Railway Ltd on Tuesday raised its offer for U.S. railroad operator Kansas City Southern by about $2 billion to $27.29 billion, deepening a bidding war with larger rival Canadian National Railway Co .

The new cash and stock offer marks a u-turn for Canada's second-biggest railroad operator, which had earlier said it would not raise its bid for Kansas City.

The acquisition of the U.S. railroad operator by either of its Canadian peers would create the first direct railway linking Canada, the United States and Mexico.

Canadian Pacific's sweetened offer consists of $90 in cash and 2.884 of its shares for each stock of Kansas City. However, it is still lower than a $29.56 billion takeover proposal agreed by Canadian National and Kansas City in May.

Including Kansas City's debt, Canadian National's proposal was valued at $33.6 billion.

While Canadian Pacific had made the initial move to acquire Kansas City in March, Canadian National swooped in with a higher bid that eventually won support from Kansas City.

The U.S. railroad operator has set a shareholder vote on Aug. 19 to gain approval for its deal with Canadian National.