(Reuters) - Kraft Foods Inc (KFT.N) escalated its battle with Starbucks Corp (SBUX.O) on Monday, saying it is asking a federal court to stop Starbucks from trying to unilaterally end their lucrative deal to sell packaged coffee.

Kraft said it is seeking a preliminary injunction in U.S. District Court in New York, seeking "to stop Starbucks from proceeding as if the agreement has been terminated, when, in fact, the contract is still in force."

Starbucks is "proceeding with flagrant indifference to the terms of the contract and customary business practices," Kraft General Counsel Marc Firestone said in a statement.

A Starbucks representative was not immediately available for comment.

Starbucks said late last month it wants to end the deal, which allows Kraft to sell bags of Starbucks coffee to grocery stores and other retailers. The business generates $500 million in annual sales for Kraft and has high profit margins.

Starbucks has argued that Kraft breached their contract, including not always meeting minimum advertising budgets. ID: nN29193436 The coffee company says the pact is due to expire in 2014 unless one of the parties decides to end it early.

Kraft denies any breach and argues that if Starbucks wants to scuttle the partnership, it must pay Kraft the fair market value of the business plus a premium of as much as 35 percent.

Kraft said arbitration proceedings it initiated last week in the matter are separate from Monday's court action and will continue. It also said Starbucks has begun to implement a transition plan that includes arranging for a new business partner.

"In its zeal to take over the business Kraft has built, Starbucks has simply declared termination as a fait accompli," Kraft said.

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