TOKYO (Reuters) - Western Digital said on Thursday it is still seeking arbitration in a dispute with Toshiba Corp 6502.T over the auction of its prized chip unit, arguing that a transfer of assets by the Japanese firm had not resolved what it calls a serious breach of contract.

Slideshow ( 2 images )

The two are at loggerheads over the sale of the unit - the world’s second-largest producer of NAND chips - that the Japanese conglomerate values at least $18 billion. Toshiba is depending on the auction to cover billions of dollars in cost overruns at its now bankrupt U.S. nuclear unit Westinghouse.

Western Digital, which jointly operates Toshiba’s main chip plant located in Yokkaichi, western Japan, has argued that the unit cannot be sold without its consent and has demanded exclusive negotiating rights.

In a letter to the U.S. firm’s lawyers dated May 31 and seen by Reuters on Thursday, Toshiba’s lawyers said joint venture interests had been moved back to the parent company from the chip unit, adding that this addressed Western Digital’s concerns and put the dispute to rest.

The assets transferred back were, however, financing vehicles for manufacturing equipment and account for less than 5 percent of Toshiba’s memory chip business. Western Digital countered that nothing had been resolved.

Although a long-standing business partner, Western Digital is not seen as a favored suitor as it submitted one of lowest offers in the first round of bidding, a source has said previously.

A separate source familiar with the matter said on Thursday that Western Digital is considering fresh investment to build another flash memory chip plant in Japan to show its commitment to the country and that CEO Stephen Milligan will visit Japan next week for talks with Toshiba to resolve the spat.

The two firms operate four memory chip plants in Yokkaichi through their joint ventures. Their fifth plant is currently under construction.

The amount of investment and a timeline for the plant’s construction have not been decided, said the source, who was not authorized to speak on the matter and declined to be identified.

A spokesman for Western Digital declined to comment. A Toshiba spokesman said the company was not aware of Western Digital’s potential investment plan or its CEO’s visit.

Sources have said that Milligan may meet with Japanese government officials to discuss a plan to join a government-led consortium of state investors and U.S. private equity firm KKR & Co KKR.N.

Other suitors for the chip business include U.S. chipmaker Broadcom Ltd AVGO.O which has teamed up with private equity firm Silver Lake, and Bain Capital which has partnered with South Korean chipmaker SK Hynix 000660.KS, sources have said.

Taiwan's Foxconn, formally known as Hon Hai Precision Industry Co Ltd 2317.TW, also formed a consortium with its Japanese unit Sharp Corp 6753.T to bid in the second round, they said.