(Reuters) - Dow Chemical Co (>> The Dow Chemical Company) averted a proxy fight with Dan Loeb's hedge fund, Third Point LLC, by agreeing to add four independent directors to its board, sending its shares up as much as 4.5 percent.

Third Point, one of Dow's biggest investors with a 2 percent stake, was considering a proxy contest after talks with Dow over board seats broke down, Reuters reported on Thursday.

Dow said on Friday the company and the hedge fund had agreed to a one-year standstill agreement, which means Third Point will not publicly criticize the company for that period.

The company has agreed to add to the board two Third Point nominees - former Foster Wheeler AG (>> Foster Wheeler AG) CEO Raymond Milchovich and Steve Miller, the non-executive chairman of AIG (>> American International Group Inc).

The two others - U.S. Bancorp (>> U.S. Bancorp) CEO Richard Davis and former IBM (>> International Business Machines Corp.) CFO Mark Loughridge - were earlier rejected by Third Point.

Both of them have previously served on other boards with Dow CEO Andrew Liveris.

The fact that Dow was able to add two of its own members, "dilutes the influence of the two board members that were added by Third Point," SunTrust Robinson Humphrey analyst James Sheehan said.

The four new directors will be among Dow's nominees for election at the 2015 annual meeting. The company has also agreed to reduce the size of its board to 12 members from 13 before its 2016 annual meeting.

Loeb, one of hedge fund industry's most closely watched investors, has been pushing Dow to spin off its lucrative but slow-growing petrochemical business and focus on specialty materials.

The company has, however, defended its strategy of using its commoditized raw materials businesses to keep costs down.

A number of chemical companies, including DuPont (>> E I Du Pont De Nemours And Co), have come under investor pressure to separate less stable businesses and raise shareholder returns.

Dow's stock, which had risen 16 percent up to Thursday's close this year, was up 3.2 percent at $53.13 on the New York Stock Exchange on Friday. It had touched a high of $53.79 earlier this year.

(Reporting by Sayantani Ghosh and Kanika Sikka in Bangalore; Editing by Joyjeet Das and Don Sebastian)