[Sniper]

LONDON (Reuters) - Online gaming firm Empire Online (LSE: EOL.L - news) <EOL.L> said talks over a take-over by larger rival PartyGaming (LSE: PRTY.L - news) <PRTY.L> had broken down and it was planning legal action against its would-be owner.

"We're not taking a decision to litigate lightly, but having taken that decision on good legal advice, then we will pursue it very vigorously," Andrew Burnett, Empire's head of mergers and acquisitions, told Reuters on Monday.

PartyGaming, which owns the world's biggest online poker room, PartyPoker, shrugged off the threat. "They're clutching at straws," said Communications Director John Shepherd.

Empire, the brainchild of Israeli entrepreneur Noam Lanir, floated its shares in June and has since lost nearly two thirds of its market value.

But analyst Robin Chhabra at Evolution Securities said PartyGaming's statement that it had offered 60p per share had underpinned Empire at around that level.

"The legal action might all be posturing by Empire," he added. "I don't think PartyGaming have to worry. As a worst case scenario they'll settle out of court, but it won't be material for PartyGaming."

Empire's Lanir is seen as one of the architects of online gaming and an industry guru, but critics said he allowed his company to become too dependent on PartyGaming.

The legal action follows PartyGaming's decision last month to ringfence its own poker players from those of four "skin sites" such as Empire -- Web sites 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 the smaller site with fewer players.

The split hit Empire hard. Last month it warned that profits would be 10 percent below expectations and on Monday it said it would sue over the damage caused.

Most analysts saw PartyGaming's move as an attempt to squeeze the skins, which were both allies and competitors, and investors feared Empire's remaining players would slowly migrate to the PartyPoker site.

RISE AND FALL

Early media reports said PartyGaming's initial approach had valued Empire's shares at 135-140 pence, valuing the company at around 400 million pounds. An earlier approach by Sportingbet <SBT.L> had valued Empire at 790 million pounds or about 269p per share.

But PartyGaming said on Monday it had proposed paying the equivalent of just 60p per share for the assets and business of Empire.

Empire would not comment on the offer price, but said it could not be recommended to its shareholders.

Empire shares lost 12 percent in pre-market trade, but later recovered and were up 7 percent at 68 pence by 11:29 a.m. GMT.

One London analyst, who declined to be named, said: "If the two biggest players in the industry have looked at it and reached no deal, then the chances are Empire is misguided about its own value."

Chhabra at Evolution said he was reassured by Empire's comments on outlook and current trading.

Empire said that two independent software platforms that it owns, Club Dice and Noble Poker, were progressing, accounting for well over half of its new players during the fourth quarter of 2005.

It said these sites, and other businesses not based on PartyGaming platforms, were expected to generate a net profit of $37 million (22 million pounds) next year, and overall net profit would be broadly in line with expectations.

But it warned that Empire Poker, its poker site that depends on PartyGaming software, could be affected by the recent loss of the three other companies from PartyGaming's software platform and by the outcome of legal action.