GKN said the offer, comprising 81p in cash per share and the rest in Melrose shares was "entirely opportunistic" and that the terms "fundametally undervalue the company and its prospects".
A bid battle is now likely as Melrose, which specialises in buying struggling businesses, turning them round and selling them at a profit with the proceeds given back to shareholders, will pursue its interest despite GKN's opposition.
Melrose responded, saying: "Melrose believes that there would be significant operational and commercial benefits arising from Melrose's ownership of GKN's businesses, reversing a history of existing GKN management not delivering on margin targets.The potential acquisition represents a significant opportunity for Melrose to execute on its strategy of maximising inherent value of specialised industrial businesses it owns".
The firm issued a profit warning in October over problems at its aerospace division.
According to Financial Times, Melrose now has until 5pm on February 9 to "put up or shut up" - either announce a firm bid or step away for the next six months, absent any change in circumstances.
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Gold futures surged on Wednesday, hitting its highest level since September 15 as investors reacted to a plunge in the U.S. The S&P 500 pared some losses after falling as much as 0.6 percent after the report, which also pushed the dollar down.
The engineering group also announced the appointment of interim boss Anne Stevens as the group's permanent chief executive.
The group said Stevens has been leading an ongoing and wide-ranging internal review of all GKN's businesses which has culminated in the development of a transformation plan to improve significantly performance.
Instead, the firm confirmed in a statement on Friday it had made a decision to split out the automotive and aerospace into two separate companies as part of a two-year "transformation programme", ending months of speculation over the firm's future.
GKN also announced it intends to separate the Aerospace and Automotive units, with further details to be determined at a later date.
A brief trading statement accompanying the announcement confirmed that the group continues to expect profit before tax for the year to be slightly ahead of last year's £678m.