Shares in EMI Group plunged more than 10 per cent after its offer for Time Warner's music division was rejected in favour of a higher bid.

EMI stock plunged to 151p in early deals before recovering to stand down 7.75p, or 4.6 per cent, at 161.75p.

The drop followed an admission from EMI that Time Warner was now "considering a possible proposal from another party" for the purchase of Warner Music, whose artists include Madonna. The rival offer is believed to have come from a consortium led by Edgar Bronfman Jr, the former chief executive of Seagram.

The decision, which is reported to given Mr Bronfman until the end of the weekend to negotiate a final deal, was seen as a bitter blow for EMI, which saw its shares hit a 52-week high earlier this month on hopes for the merger. EMI on Wednesday pleased the City by reporting flat interim turnover, and a marginal drop in profits, despite a 10 per cent shrinkage in a global music market undermined by CD piracy and internet file sharing sites.

EMI's response to Time Warner's decision was unclear, the company unavailable early on Friday to expand on a statement by Eric Nicoli.

"When we reach a definitive conclusion we will make a further announcement," Mr Nicoli said.

EMI's offer was believed to have been placed at about $1.6 billion, with Mr Bronfmann's reported at about $2.5bn.