Shares in Sun Microsystems plunged as much as 24 per cent today after talks with IBM over a takeover bid broke down.

IBM withdrew its $7 billion offer after Sun terminated IBM's status as its exclusive negotiating partner, according to reports.

The shares slumped $2.01 to $6.49 in early trading. But the stock stayed above its previous level of about $5 before rumors of the deal were reported in mid-March on the hope that the deal might yet happen.

The collapsed talks are expected to damage the smaller Sun more than IBM, the world's largest technology services provider, which has fared relatively well despite the global economic slump thanks to its outsourcing business and its shift from hardware to higher-margin software sales. The takeover, if it were to go ahead, would be the largest acquisition in the history of IBM.

Sun has reportedly been looking for a buyer for several months and there are no obvious other suitors in the wings. The Wall Street Journal reported that Sun's board was split over the prospective sale, with a faction led by Sun's chairman and co-founder, Scott McNealy, opposing the deal and a group led by Chief Executive Jonathan Schwartz in favor.

Sun rose to prominence selling high-end computer servers in the 1990s but never fully recovered from the dotcom bubble burst earlier this decade. Analysts also say it has failed to fully capitalize on its software assets including Solaris and Java.

Tim Ghriskey, chief investment officer for Solaris Investment Management, which manages about $2 billion, said the latest developments could be part of negotiating tactics and that Sun is still likely to strike a deal.

"Like any acquisition candidate they are trying to force the highest bid possible," Mr Ghriskey said. "IBM doesn't necessarily need these assets. But I think they could probably benefit from them at a reasonable price."

Sun was said to be unhappy with IBM's offer of $9.40 per share or below.

When the news of the deal came out two weeks ago, shares in Sun Microsystems almost doubled to nearly $9. The deal would be likely to prompt an antitrust challenge in the US because a combined IBM and Sun would have a 42 per cent share of the computer server market.

The Wall Street Journal reported that Sun had demanded assurances from IBM that it would proceed with the deal in the face of regulatory challenges, fearing IBM's offer left too much room for it to walk away.

IBM, meanwhile, was concerned about the size of payments that would be received by senior Sun executives and engineers under Sun's "change of control" agreements, according to The New York Times. Such agreements are intended to compensate employees if they lose their jobs when a company is acquired.

After initially discussing a price in the range of $10 to $11 a share, IBM had lowered its bid to $9.55 and then reduced it further over the weekend to $9.40, according to the Times. Sun then notified IBM that it was terminating exclusive negotiations, and IBM withdrew its offer.

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