JC Flowers was dealt a severe blow yesterday after Kaupthing, the Icelandic bank, walked away from plans to buy the Dutch merchant bank NIBC for €3 billion (£2.23 billion), casting doubt on the American investor's ambitions to expand into United Kingdom financial services.

Kaupthing agreed to buy the unlisted NIBC in August from a consortium of shareholders led by JC Flowers and planned to fund the purchase by issuing new equity.

However, the deepening credit crunch has made it impossible for the acquisitive Icelandic bank to proceed with its bid.

It comes a day after Mitchells & Butlers was forced to take a £391 million hit after a planned joint venture was scuppered by the credit markets.

Michael Enthoven, the chief executive of NIBC, said: “Together with Kaupthing we agreed that the current market conditions bring the benefits of the acquisition under pressure and do not form a solid base on which to build a combined future.”

The collapse of the deal will be a huge disappointment for Christopher Flowers, the former Goldman Sachs banker at the helm of the New York-based private equity firm.

He was recently forced to settle a lawsuit for pulling out of a large buyout deal in America and also failed to get on the preferred bidding list for Northern Rock.

This latest development could have a bearing on JC Flowers' chances of taking over Friends Provident, the UK life insurer that Mr Flowers is trying to win over.

The New York firm has already made an informal approach at 175p per share for Friends, whose management are understood to be holding out for a minimum of 200p. JC Flowers is expected to return with an informal revised approach today after Friends unveils its strategic review.

It is believed that JC Flowers feels it has an increased chance of success in its bid for Friends given that the insurer's newly appointed chief executive, Trevor Matthews, will not start the job for another six months.

Since the NIBC deal was announced, Kaupthing's funding costs have rocketed in the wake of the global credit crisis, and media reports have speculated that the Icelandic regulator could block the deal or require that Kaupthing raise more funding to protect its own balance sheet.

Kaupthing had planned to issue new share capital of up to 210 million shares in total, of which the JC Flowers-led consortium would receive 140 million, to fund the deal.

However, the Icelandic bank said yesterday that the sale of shares had been cancelled.

Kaupthing, like other banks, has been hit by the turmoil in credit markets. Its shares have fallen more than 30 per cent in the past three months and Kaupthing's five-year credit default swap spreads, which measure the cost of insuring against default on debt over five years, have soared amid market jitters over the bank's risk profile.

Any hopes that JC Flowers had of mounting a potential bid for Northern Rock now look to have been all but dashed.

Although the private equity group was not on the official preferred bidding list for the stricken Newcastle-based bank, sources had said that JC Flowers would be welcome to submit a new proposal by the Government's deadline of February 4.

Full bloom

— Ravi Sinha, head of JC Flowers's European private equity business, has been circling potentially attractive financial services assets in the UK and across the Continent for at least two years. Although best known for its interest in Northern Rock, the American private investment group has a growing track record of deals

— It has been associated with Friends Provident since 2005, when speculation first surfaced that it had approached Standard Life with a view to a joint bid for the insurer. This amounted to nothing.

— With a growing reputation as a buy and hold investor, Flowers already owns stakes in considerable financial assets. As well as buying the broking operations of Marsh & McLennan, the US insurer, in 2005 Flowers also took control of Dutch merchant bank NIB Capital as part of a consortium bid. The following year it pioneered the first acquisition by a private equity firm of a stake in HSH Nordbank of Germany. It also took part, alongside employees, in a buyout of Fox-Pitt, Kelton, the New York based investment bank.

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