The lawyer for the Andersen accounting firm, Rusty Hardin, notified government attorneys that the company was not in position to make a decision on any criminal settlement.
"We just agreed that we're just not there right now," Hardin said. "We rejected certain proposals by the government and agreed to continue to review other proposals of the government, but we could not complete that review within the time frame the government was demanding."
The government, which had set a deadline for an agreement from Andersen, indicated it would begin looking to the May 6 trial date. "We are continuing to prepare for trial," Justice spokesman Bryan Sierra said.
Both Hardin and company spokesman Patrick Dorton left open the possibility that negotiations could resume.
"We certainly are willing to continue having discussions on this matter," Dorton said.
The collapse of secret negotiations occurred after the outlines of a deal had been struck, and the sides had expected to announce a settlement this week.
In recent days, Andersen's lawyers could not agree with government lawyers on specific language admitting guilt in illegally destroying Enron documents, said a person familiar with the negotiations who spoke on condition of anonymity.
Andersen also had balked at the length of time the Justice Department had proposed for deferring possible prosecution of the accounting firm, arguing that three years was too long, this person said.
Hardin insisted talks did not break down because of those two issues. He declined to say what the sticking points were because "that doesn't help the negotiations process."
The Securities and Exchange Commission, meanwhile, is pursuing a civil investigation of Andersen and Enron.
SEC spokeswoman Christi Harlan declined comment on the breakdown of talks between Andersen and the Justice Department.
SEC Chairman Harvey Pitt said that Andersen, despite its deepening business woes, is still a "functioning" company.
"I'm not ready to write its epitaph just yet," Pitt said in an interview Thursday on CNN's "Moneyline," which was taped before the breakdown of negotiations.
The Chicago-based accounting firm is being whittled down as its U.S. offices prepare to withdraw. Layoffs and defections are planned overseas and more U.S. clients abandon Andersen.
Thursday's end to talks came after weeks of negotiations between the Justice Department and Andersen in the wake of the firm's criminal indictment, which was unsealed March 14. Talks intensified after the government accepted a plea agreement from David B. Duncan, the former senior Andersen auditor on the Enron account.
In the indictment, the grand jury accused Andersen of destroying "tons of paper" at its offices worldwide and deleting enormous numbers of computer files on its Enron audits.
Duncan pleaded guilty April 9 to destroying documents related to Enron's collapse. He agreed to cooperate with federal prosecutors and is to be sentenced in August.
The government had offered to defer any criminal prosecution of Andersen for up to three years, requiring Andersen as a corporation to cooperate in the investigation of Enron and promise not to violate any laws during that period.
In exchange, Andersen was expected to admit publicly it knew that employees were wrongfully destroying documents. Under the offer, Andersen could avoid the risks from either a guilty plea or a courtroom conviction. Company officials have expressed concerns that regulators in some states could revoke Andersen's license to operate if it didn't win its criminal case outright.
Anderson also has been negotiating separately to settle civil lawsuits brought by Enron shareholders and creditors.
People close to the civil discussions said Thursday that when those talks broke off Wednesday in New York without an agreement, lawyers expected to try again after regrouping. But the abrupt end to criminal settlement talks makes that unlikely, these people said, since Andersen wanted a settlement covering all aspects.
One plaintiff's lawyer said that Andersen's failure to reach a criminal deal means it has less of a pressing need to reach a civil settlement.
"The package from Andersen was always 'We get the criminal side solved, then we can go forward. If we can go forward, then you guys can get your money," the lawyer said.
Andersen's decision not to reach a criminal deal may also signal that it sees a dissolution of its partnership and the continued sale of its various units as more palatable than life under the Justice Department's terms.
Andersen lawyers have suggested that the combined injuries to the firm, which has lost more than 200 clients since the Enron fiasco, on so many fronts has made such an outcome a possibility.
But another source familiar with negotiations in the civil cases said the civil and criminal matters aren't necessarily closely linked so civil negotiations can continue.