British music firm EMI has pulled out of the bidding for the recording arm of US media giant Time Warner.

The decision leaves the way open for a US private investment group to clinch a $2.6bn (£1.5bn) takeover.

EMI said it had been unable to agree terms "which would be... in the interests of EMI's shareholders".

The private investors, led by ex-Seagram boss Edgar Bronfman, are expected to announce the terms of a takeover deal later on Monday.

EMI had been trying to clinch its own deal with Time Warner, to add artists such as Madonna and REM to its roster.

The group already plays host to artists including Kylie Minogue, the Red Hot Chilli Peppers and Robbie Williams.

Merger mania

But the regulatory obstacles could have been formidable and may have scared Time Warner off.

The pull-out means EMI has now lost out in three merger attempts in just three years, following earlier talks with Warner Music and another negotiation with Bertelsmann music unit BMG.

Excluded from a general industry consolidation, EMI may itself now become the target of takeover moves.

Newspaper reports over the weekend suggested that EMI could in line for a takeover bid, from US private equity firm Blackstone.

The group could offer as little as £1.5bn for EMI, the Observer newspaper reported.

Shares in EMI, the world's third largest record company, gained 1.7% in morning trading, boosted by an upgrade recommendation from investment bank Goldamn Sachs.

EMI shares suffered late last week when the rival bid first edged into the lead,

Besides regulatory issues, the failure to agree terms suggests that Time Warner was keen to offload all its music assets in one go.

EMI's bid had only been for the recording side of the business, while the Bronfman-led deal promises to take the publishing arm off Time Warner's hands as well.

That, analysts said, could be what clinches things for the US giant, which is desperate to pay off debt as quickly as possible.

"This really shows that Time Warner wants out of the music business," Accenture media partner Theresa Wise told the BBC.

Options open

But success for the Bronfman-led group - which also includes media billionaire and Power Rangers creator Haim Saban - could still leave EMI in the running.

Since the group is a private investment vehicle, it may well want to sell on Time Warner's music assets piece by piece, a strategy that could see EMI back in the running.

EMI kept sales and operating profits steady in the six months to the end of September, despite a downturn in the music business as a whole.