(Recasts with Oi share, bond performance; Adds details, comments throughout)
By Guillermo Parra-Bernal and Maria Kiselyova
SAO PAULO/MOSCOW, Feb 25 (Reuters) - Shares and bonds of Oi SA, Brazil's most indebted telephone operator, tumbled on Thursday after Russian billionaire Mikhail Fridman's investment firm dropped an offer to finance the takeover of a Brazilian rival.
Fridman's London-based LetterOne Holdings SA said earlier that a plan to inject $4 billion into Oi had been bagged, after takeover target TIM Participações SA told the investment firm it would not participate in the deal.
The flopped merger plan forces Oi's strategic planning back to square one, as the company struggles with about 10 billion reais ($2.5 billion) in debt maturing this year, less available cash to invest and slipping revenue as a result of Brazil's deep recession.
The LetterOne proposal was seen as a lifeline for Oi, propping up shares and bonds of the Rio de Janeiro-based carrier for months. Oi's shares shed 15.4 percent to 1.71 reais, a 23-year low, on Thursday.
The price on Oi's 5.75 percent bond due in February 2022 slumped to 35 cents on the dollar, about 9 cents less than in the prior session.
"Following the breakdown of its M&A prospects, the organic route to 'safety' for Oi looks increasingly tricky and the prospect of debt restructuring more likely," said Richard Dineen, an analyst with UBS Securities in New York.
TIM shares fell 0.5 percent to 6.35 reais. Telecom Italia , which controls TIM, was up 4.3 percent at 0.90 euros a share, outperforming a 3.2 percent rise in the Stoxx Europe 600 European telecoms sector index.
An Oi-TIM merger would have created Brazil's No. 1 wireless carrier, overtaking Telefonica Brasil SA and bringing together the operator of the country's second-biggest mobile network and Oi, owner of the biggest fixed line network, at a time of convergence in that industry.
Investment bank Grupo BTG Pactual SA, which co-owns a sizable stake of Oi along with some clients, has been seeking a merger for the telecom firm, which lags behind its three major rivals in Brazil with 18 percent of mobile phone subscribers.
Oi Chief Executive Bayard Gontijo has streamlined operations and worked to cut the company's 35 billion reais in net debt.
LetterOne's business unit L1 Technology had offered in October last year to pour up to $4 billion into Oi if it merged with TIM.
"L1 Technology has been informed by TIM that ... it does not wish to enter into further discussions about the facilitation of a merger between Oi and TIM in Brazil," said LetterOne, the majority owner of mobile telecoms group Vimpelcom.
A source close to the matter said LetterOne's proposal would have resulted in Telecom Italia losing control, diluting a 67 percent stake it owns in TIM Brasil to around 30 percent of the combined entity, compared with a share of around 43 percent held by the investment group.
Such a scheme was unacceptable to Telecom Italia, the source said.
$1 = 3.95 Brazilian reais Additional reporting by Agnieszka Flak in Milan; Editing by Greg Mahlich and Paul Simao