Internet gaming website Empire Online has acrimoniously cancelled takeover talks with PartyGaming and launched a legal action against the operator of PartyPoker after it ringfenced its customers from rival sites.

Empire Online, which runs Empirepoker.com, said it had "terminated discussions" with PartyGaming after the group came back to the company with a second takeover proposal "at a level that cannot be recommended".

Having initially tabled an all-share offer that valued Empire Online at 10 per cent of an enlarged group - approximately £400 million - Empire said PartyGaming "made a revised proposal that is significantly different both in terms of the price and structure".

Although Empire did not state the level of PartyGaming's offer - which it said came after "a protracted due diligence process and continued delays in the timetable" - the second tilt was almost half the first and also contained a cash element.

PartyGaming later confirmed its offer for the business and assets of Empire Online was worth roughly 60p a share, valuing the company at about £175 million.

Of the proposed legal action it said: "To the extent that any action is forthcoming, PartyGaming is highly confident of a successful outcome."

John Shepherd, director of corporate communications at PartyGaming, added: "They're clutching at straws."

But as it pledged to investigate "commercial strategic opportunities" and reiterated its profits targets after the collapse of the talks, Empire said it planned "to institute and vigorously pursue legal proceedings" against PartyGaming.

This comes five weeks after PartyGaming took steps to end its formal links with its "skins" - the websites such as Empire Online that make money by directing gambling traffic to its group websites.

"The directors of Empire Online have explored whether legal action might be taken ... in relation to damage caused to it by the conduct of companies within the PartyGaming group in separating the poker system used by PartyGaming players from that of its skins," Empire said.

"Having received legal advice, the directors intend to institute and vigorously pursue legal proceedings as soon as possible."

It has already warned that profits for the full year will fall by 10 per cent as a result of PartyGaming's move.

Empire, led by chief executive Noam Lanir, said it has received several "commercial strategic approaches" over the past few months and said it would pursue talks with the parties involved, which it did not name. It said its strategy in relation to Empirepoker.com would depend on the outcome of any legal action against PartyGaming.

It said that its businesses that have no relationship with PartyGaming, including Club Dice and Noble Poker, are on course to make profits after tax of about $37 million (£21.5 million).

It said profits at Empire Poker, which as a poker website does have a relationship with PartyGaming, "could be impacted" by the commercial changes and by the outcome of the proposed lawsuit.

Just last week, PartyGaming redrew its relationships with its other skins - parting company with Coral Eurobet and effectively buying out Multipoker.com and IntertopsPoker.com.

Shares in Empire Online dropped nearly 5 per cent (down 3p) to 60.5p in early deals. PartyGaming lost 1.5p (a fall of more than 1.5 per cent) to 96.5p.

For share details on PartyGaming click here

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