Friends Provident's turnaround effort suffered its second successive blow today after the UK's fourth largest insurer admitted that the sale of Pantheon Financial, its high-end financial adviser had collapsed.

The deal was to have been the first of three asset sales set in motion in January, when Friends decided to exit wealth management following its abandoned £8.4 billion merger with Resolution, Clive Cowdery's investment vehicle.

Hopes of a speedy completion of the second part of the sell-off, offloading Friends' 52 per cent stake in F&C Asset Management, dimmed late last week after Dawnay Day, the investment firm, dumped its 20 per cent holding in the market at a massive discount.

Several potential buyers, including Aberdeen Asset Management and Pearl, the closed life funds group, are thought to have turned down the chance to buy F&C shares for just £1 each.

It is understood that Friends had agreed to sell Pantheon to a unnamed private equity firm for about £30 million. Sources said that a "fair price" had been accepted and due diligence had taken place.

However, the buyer dropped out of the sale process late last week for undisclosed reasons. It is thought to have been spooked by volatile conditions in the equity markets.

Friends, which has not ruled out revisiting a sale if interest revives, said it had decided to retain Pantheon in order to avoid disruption to its network of financial advisers and because it had concluded that it could not achieve a high enough sale price in the short term.

Friends agreed to pay £30 million over three years to buy Pantheon before the credit crunch hit. The price included earn-out and performance related payments.

Friends shares rallied almost 4 per cent on the news, rising 3.1p to 85.4p.

Barrie Cornes, analyst at Panmure, said the failed sale was "disappointing". He maintained his 'buy' recommendation but cut his price target from 135p to 102p.

He predicted that first half operating profits, due to be reported on August 7, will slide 15 per cent to £225 million before tax. New business sales will drop 8 per cent to £3.15 billion, reflecting the continued slide in investment and protection, he said.

Friends still has a chance of selling Lombard, its European wealth management business. CVC Capital Partners and rival private equity firm Hellman & Friedman are thought to be competing for Lombard but are not expected to pay the £700 million that the business had been expected to attract.

Friends fought off a £3.5 billion takeover proposal from JC Flowers, the American private equity firm, earlier this year.

It ousted its chief executive, Philip Moore, after the Resolution debacle. It is waiting for his replacement, Trevor Matthews, the former head of Standard Life's UK business, to take the helm at the end of this month.

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