FRANKFURT/DUESSELDORF, May 11 (Reuters) - German warship builder TKMS effectively ruled out a bidding war for smaller shipyard German Naval Yards on Monday, with its CEO saying the proposed purchase was "an option, but not a must" after a rival bid from Rheinmetall.

Europe's naval firms are exploring tie-ups and partnerships amid accelerating consolidation in the booming defence sector, with Rheinmetall, the region's top ammunition maker, having last year joined the fray after the purchase of shipmaker NVL.

German Naval Yards (GNYK), which employs around 350 workers, has attracted bids from TKMS and Rheinmetall, with sources saying British defence, marine and industrial firm Inocea Group was also interested.

"We are not prepared to pay any price in the world," TKMS CEO Oliver Burkhard said, dampening market expectations of a competitive bidding process for GNYK, which is part of France's family-owned CMN Naval group.

TKMS shares were trading 5.7% lower at 1320 GMT, along with a broader decline in European defence stocks.

STRONG RESULTS

Burkhard said there was a limit to what TKMS could offer, without naming the price tag, adding that while Rheinmetall was stronger financially TKMS scored higher in terms of experience and cooperation.

Rheinmetall, which previously also bid for TKMS before it was spun off from parent Thyssenkrupp, declined to comment. The group said last week it had submitted a bid for GNYK and already started due diligence.

TKMS has been riding a wider boom in defence stocks since listing in October, a trend that has recently subsided as investors reassess valuations and the future of warfare, with the Iran war highlighting the effectiveness of low-cost drones.

TKMS also posted first-half results that were slightly higher than expected, as well as a fresh record in order backlog of 20.6 billion euros ($24.3 billion), as demand for weapons continues to surge across Europe in an effort to reduce the region's military reliance on Washington.

"TKMS stays well positioned for the coming decades in a volatile defense sector where we see rising risks at its competitors," analysts at mwb research said.

Adjusted operating profit in the six months through March rose 13.2% to 60 million euros, while sales climbed 10.2% to 1.17 billion. Analysts in a poll provided by TKMS had forecast operating profit of 59 million euros and sales of 1.10 billion.

($1 = 0.8495 euros)

(Reporting by Christoph Steitz and Matthias Inverardi; Editing by Ludwig Burger, Emelia Sithole-Matarise and Alexander Smith)

By Christoph Steitz and Matthias Inverardi