Qatar, which remained silent on its intentions for months as it built the second-largest stake in Xstrata, said in a surprise statement on Tuesday that it supported the principle of the deal but demanded an improvement in terms from 2.8 new Glencore shares for every Xstrata share to 3.25.

The 11th-hour rebuff will make it very difficult for Glencore and Xstrata to push the merger through on current terms, several sources close to the deal said, leaving two days for Glencore to sweeten the offer or delay shareholder meetings scheduled for mid-July.

"Maybe this now allows the deal to be restructured, to make it more likely to succeed, and the external pressure allows this to happen without too much loss of face," one top 40 Xstrata shareholder told Reuters.

The statement triggered intense negotiations and an emergency charm offensive from Glencore executives trying to understand the Gulf state's motivations and bring them back onside.

"Glencore need to talk to Qatar and find out what they are thinking," said one source familiar with the matter, adding it was too soon to write off the deal.

Analysts cautioned, however, that the deal could well be kicked down the road for at least six months or as much as 12, as Glencore could refuse to budge.

"Given conditions in the market, a lower offer would be more suitable than an improved one, so I think anyone hoping for an improved bid is optimistic," one analyst who asked not to be named told Reuters.

"Without changes, the deal is definitely dead in the water. But don't underestimate Glencore's confidence in its position."

The last-minute demand added to further pressure from shareholders already angered by hefty executive retention payments tied to the deal, regardless of performance.

In the first sign of movement, Glencore released a short statement on Wednesday morning saying the board of Xstrata had proposed to change certain aspects of the management incentive arrangements.

A source familiar with the situation said the proposed changes include tying pay to performance.

"I really don't expect them to go to 3.25 or to get rid of the retention package completely, but I think it may well be worth their while to come up with some sort of compromise," said Charles Stanley analyst Tom Gidley-Kitchin.

At a ratio of 3.25 percent, the offer would be worth $30 billion.

Glencore, which made its move on Xstrata in February, had been expected to improve the terms of its all-share deal in the early days after the offer was announced.

But those hopes faded in the months that followed as Glencore, already Xstrata's largest shareholder, with almost 34 percent, stuck to its guns, as target Xstrata faced falling thermal coal prices and increased uncertainty over Argentina and Peru - key to its growth prospects.

On Tuesday, before Qatar's unexpected announcement, Xstrata shares were trading around a 2.6 ratio, implying the market was not expecting a change to terms. Shares in Xstrata were flat, and Glencore's down about 1.5 percent in early trade on Wednesday.

Analysts said the unexpected intervention from Qatar meant a change in Glencore's terms - combined with the changes to retention packages for Xstrata bosses - was now virtually inevitable to rescue the deal to create an integrated mining and trading powerhouse.

But they said it was not clear Glencore would raise its bid as high as 3.25 - at the high end of initial expectations and a level at which some say the deal could destroy value for Glencore.

"We believe a bump - probably from 2.8 to 3.0 Glencore shares per Xstrata share - may be necessary to win over (Qatar) and other Xstrata shareholders," Jefferies analysts said in a note. "However, we do not believe Glencore will bump to a ratio of 3.25 times."

Analysts said failure to secure the deal would not only cause a short-term drop in Xstrata shares, currently trading at a premium to the sector, but would also prove damaging for Glencore, whose bosses have long traded on their reputation as dealmakers.

It would also, though, prove potentially damaging for Qatar, which has invested more than $4 billion to become Xstrata's largest minority shareholder.

NEGOTIATING POSITION

Several sources close to the deal said on Tuesday that Qatar's demand for 3.25 was likely a negotiating position, part of a strategy that included Tuesday's unexpectedly public statement.

"In our view, the news about Qatar requesting a bump and the recent strong shareholder opposition to the Xstrata management retention awards are problems. But ... these are likely not insurmountable hurdles to the proposed Glencore Xstrata merger," Jefferies said. "A bump from Glencore and a revision to the management retention awards should be the logical next steps. We continue to expect this proposed merger to happen."

Glencore and Xstrata have until Thursday to alter the terms of the deal without having to change the dates of shareholder votes, set for mid July.

Glencore and Xstrata have declined to comment on the Qatari announcement.

(Additional reporting by Sarah Young and Clara Ferreira Marques; Writing by Kate Holton; Editing by Will Waterman)

• A Permanent Economic Emergency