July 1 (Reuters) - U.S. health regulators have rejected Merck & Co's new insomnia drug application but opened the door to approving a lower-dose version of the medication, the company said on Monday.

Merck said it received a complete response letter from the U.S. Food and Drug Administration saying that the agency could consider a 10 milligram starting dose of suvorexant for most patients, but that the company would have to have that dosage ready before it could be approved.

The FDA in its letter said 15 mg and 20 mg doses would be appropriate in patients in whom the 10 mg dose is well-tolerated but not effective, Merck said.

ISI Group analyst Mark Schoenebaum said the manufacturing study could lead to about a one-year delay in approval, especially if the FDA asks for long-term stability testing of the lower dose version.

Merck declined to discuss the timeline or potential length of delay as a result of the FDA response.

Merck had proposed that elderly patients start by taking 15 milligrams of the drug and increase that to 30 if necessary, and had recommended that non-elderly adults start on 20 milligrams and increase to 40 milligrams if needed. In its letter, the FDA determined that doses of 30 mg and 40 mg were not safe for approval, Merck said on Monday.

Merck said it doesn't see the need for further clinical studies to move forward with a 10 mg dose, but would require manufacturing studies to move ahead.

Such manufacturing studies typically involve development of standard manufacturing and operational procedures to demonstrate that the pill can be manufactured in a stable and reproducible form. It could also require demonstrating that the medicine has a durable shelf life.

"We know how to do this. We do this all the time," Merck spokesman Steven Cragle said.

ISI's Schoenebaum, who forecast annual suvorexant sales of $700 million by 2018, in a research note estimated a modest impact to Merck from the delay, and found a silver lining in that "suvorexant at 15 mg and 20 mg doses appears to the FDA to be approvable."

He said a one-year delay lowers ISI's 2018 Merck EPS estimate by only 0.25 percent to 0.6 percent.

Merck also said it will discuss with the FDA whether additional studies will be required to support a 5 mg dose for certain patients.

Suvorexant belongs to a new class of insomnia medicines called orexin receptor antagonists and would be the first such medicine on the market if approved. It is designed to facilitate sleep by blocking neurotransmitters in the brain that help to keep a person awake.

Merck shares were up 13 cents at $46.58 in afternoon trading on the New York Stock Exchange. (Reporting by Michele Gershberg and Bill Berkrot; Editing by Gerald E. McCormick, Gary Hill)

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