British online gaming firm Empire Online said talks over a takeover by larger rival PartyGaming had broken down and that it was planning legal action against its would-be owner.
The legal action follows PartyGaming's decision last month to ringfence its own poker players from those of four "skin sites" such as Empire - websites that used PartyGaming's poker software to power their own online poker rooms.
Under the old system, players on skin sites enjoyed competing against a large pool of competitors including PartyGaming's, but after the split they were confined to their own smaller site with fewer players.
The split hit Empire hard. Last month it warned that profits would be 10 per cent below expectations and on Monday it said it would sue over the damage caused.
Early media reports said PartyGaming's initial approach had valued Empire's shares at 135-140p, valuing the company at around £400 million ($685.3 million).
Empire would not comment on the offer price, but said it could not be recommended to its shareholders.
Some analysts said the rift spelt trouble for Empire, the brainchild of Israeli entrepreneur Noam Lanir, which floated its shares in June and has since lost nearly two thirds of its market value.
Empire has recently been hit by PartyGaming's acquisition of two of the other skin sites and the decision of a third, Coral Eurobet, to leave and set up its own software platform.