The snag in negotiations came on the same day that activist investor Daniel Loeb, of hedge fund ThirdPoint, sought to install his own slate of directors on Yahoo's board, further highlighting the turmoil engulfing the one-time Web pioneer.

Loeb, who has opposed Yahoo's previous efforts to strike a minority investment deal with private equity, disclosed plans to nominate former NBC Universal CEO Jeff Zucker, along with himself and two others, for Yahoo's board in a regulatory filing with the Securities and Exchange Commission on Tuesday.

A collapse of the proposed Asian asset deal - referred to as a cash-rich split-off - would mark the latest setback for an erstwhile Internet leader struggling to turn its business around and appease unhappy shareholders.

Yahoo, whose revenue slid by more than a fifth last year, brought in former PayPal President Scott Thompson as chief executive in January, five months after Carol Bartz was fired.

Two people briefed on the situation described the deal as effectively dead in the water - noting the unreasonable terms sought by Yahoo during talks in Hong Kong and a disconnect between Yahoo's negotiating team and its strategic stakeholders.

Alibaba Group, whose Chinese e-commerce unit Alibaba.com is listed in Hong Kong, and Japan's Softbank Corp, which owns around 30 percent of Alibaba, planned to seek clarity on the matter from Yahoo's Thompson, one of those sources said.

"They (Yahoo) left town knowing how everybody felt ... Alibaba and Softbank are going to be reaching out to the new CEO to get clarity on what the heck happened," said the source.

Yahoo appeared to see things differently. The company had not been informed that the tax-free deal was officially off the table, and it remained committed to continuing negotiations, according to one of the sources familiar with the matter.

Yahoo representatives including Chief Financial Officer Tim Morse returned to the United States late on Monday after a week of negotiations in Hong Kong, and another call was set for this week, that source said.

Yahoo and Alibaba officials declined to comment.

The sources said Yahoo and its Asian partners could still strike another, simpler and taxable, deal, but there was no agreement yet on the price at which Yahoo should sell.

One of the sources close to the matter said Yahoo was not going to revisit the price of the deal, even though Alibaba's value may have risen while the talks were going on, and any increase could influence whether the deal on the table made sense for Yahoo.

None of the sources wanted to be named in this article due to the sensitive nature of the private talks.

Yahoo shares closed down 4.7 percent at $15.36 on Tuesday, the stock's biggest one-day percentage drop in 16 weeks.

"I think the deal's either dead or it's going to take a lot longer to complete, which means we don't have a near term catalyst; hence the sell-off," said Brett Harriss, an analyst with Gabelli & Co.

The deal would have seen the return of Yahoo's slices of Alibaba and Yahoo Japan back to those companies, in exchange for unspecified assets.

Investors had hoped Yahoo, after years of foot-dragging, would finally arrange for the sale of its Asian assets, considered among the most valuable parts of its portfolio.

AllThingsDigital, which initially reported the snag in the negotiations on Tuesday, cited one source as saying discussions "completely halted" after negotiators from Yahoo - whose chairman, Roy Bostock, is due to step down and whose CEO is barely a month into the job - changed tack on what they wanted from the deal. The report gave no details.

It was unclear what exactly had caused the sudden impasse in negotiations, roughly two months after the various parties had agreed to basic terms for a deal.

A third source familiar with the talks said Yahoo's negotiators had a change of heart, though it was unclear why.

"Over the last few days in Hong Kong, it became evident that they don't really have a desire to do this deal," that source said, dismissing speculation both sides might have split on valuation terms agreed in December. "A cash-rich split appears to be toast."

SPIN?

The slightly different interpretations over the current state of the deal by people familiar with the matter raised the possibility that the public airing of the latest snag could be a negotiating tactic.

"It could be a negotiating ploy by either side, or it really could be a breakdown in negotiations," said Gabelli's Harriss, noting friction in the relationship between Yahoo and Alibaba.

Alibaba founder Jack Ma has tried to buy back the 40 percent of his company owned by Yahoo several times in recent years, only to be rebuffed by Yahoo.

The rocky relationship between the companies came to a head last May when it was revealed that Alibaba had abruptly handed Alipay - one of Alibaba's crown jewels - to a company controlled by Ma, apparently without Yahoo's knowledge.

"I find it very hard to believe that Alibaba and Softbank will just walk away," said Ryan Jacob, chairman and chief investment officer of the Jacob Funds.

If the companies can't agree deal terms, Jacob speculated Alibaba might team up with private equity investors in the United States and seek to acquire Yahoo outright - allowing Alibaba to regain its shares from Yahoo, while private equity could take control of Yahoo's U.S.-based Internet business.

"Having U.S. partners just makes the most logical sense, because they're going to need help on financing, and in the long term they really don't want the core Yahoo business anyway," said Jacob, whose firm owns shares in Yahoo.

Analysts say Yahoo failed to take aggressive action in past years to reverse a decline in advertising revenue in the face of competition from Google Inc and Facebook.

This month, Bostock announced he and three other directors would step down, following co-founder Jerry Yang out the door. Yang was excoriated for turning down a rich Microsoft Corp acquisition bid in 2008.

ThirdPoint's Loeb said the recently announced changes to Yahoo's board, including Yahoo's announcement of two new board members, do not put the company on "the right track."

Yahoo fired back with a statement on Tuesday that it was disappointing that Loeb "has chosen a potentially disruptive path, just as the company is moving forward under new leadership."

In Tokyo on Wednesday, Yahoo Japan shares slumped as much as 8.1 percent, and last traded down 3.9 percent at 25,020 yen. Alibaba.com shares have been suspended in Hong Kong since last Thursday.

(Additional reporting by Nadia Damouni in NEW YORK and Melanie Lee in SHANGHAI; Writing By Edwin Chan; Editing by John Wallace, Richard Chang, Bernard Orr, Phil Berlowitz and Ian Geoghegan)

• A Permanent Economic Emergency