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MINNEAPOLIS (AP) _ Federated Department Stores said Monday that it had stopped negotiations to sell Fingerhut to an investor group, and it was likely the catalog subsidiary would be broken up.

A group led by Minnesota businessman Peter Lytle was working with Federated on a deal, but the parties said a ``difficult economic environment'' made it difficult to finance the acquisition.

Federated will attempt to sell parts of Fingerhut to third parties, trying to preserve as many jobs as possible, Federated Vice Chairman Ron Tysoe said. The company will wind down Fingerhut's catalog operation over the next 30 days.

No other potential buyers have emerged to buy Fingerhut whole since Federated announced in January it planned to dispose of the subsidiary, Tysoe said.

Federated expects to sell catalog subsidiaries Arizona Mail Order, Figi's and Popular Club as going concerns, he said. The Fingerhut sell-off should bring Federated $1.1 billion to $1.3 billion after taxes over the next four years, Federated said.

``We are very disappointed,'' said Marshall Masko, a senior partner in the Lytle-led group. ``The company is in our backyard, and we had hoped we would be able to save jobs and acquire the company. We were working with Fingerhut management through last week on some of that, on a restart plan.''

Masko said it was very unlikely that talks would begin again.

Before Federated announced plans to close Fingerhut, the subsidiary employed about 4,700 people in Minnesota _ including nearly 2,700 in St. Cloud, and another 1,300 in Tennessee.

Federated, based in Cincinnati, announced on Jan. 16 that it would shut down Minnetonka-based Fingerhut unless a buyer could be found.

After the announcement, several potential buyers contacted the company, including groups led by Lytle, a business turnaround specialist from Wayzata; Tom Petters, owner of Petters Cos. and Redtag Inc. in Eden Prairie, and Minneapolis businessman Paul Ellarby, in addition to KPS Special Situations Fund, a New York-based equity fund.

``It's a tremendous disappointment, and I feel a tremendous loss for the employees,'' Lytle told the Star Tribune in a telephone interview.

Petters said he still was interested in Fingerhut and expected to contact Ted Deikel, Fingerhut's former owner, to explore a bid for all or parts of Fingerhut.

``Absolutely,'' Petters said. ``I think we told everybody, we had a backup, we didn't want to interfere with anything that Lytle had in place.''

But Sanger repeated that Lytle was the only buyer who had ever been interested in ``the whole enchilada.''

Jane Palmbach, a leader of the Union of Needletrades, Industrial & Textile Employees in St. Cloud, said the union would keep the pressure on Federated to talk with other investors.

``While we're disappointed, we think Federated should not be focusing on selling the assets, but should be talking to Petters or Deikel or any others interested in buying the company,'' Palmbach said.

Fingerhut was founded in 1948 by brothers Manny and William Fingerhut, who manufactured and sold car seat covers from their garage on Lake Street in Minneapolis. The company offered credit to people who couldn't get credit any other way to buy its products.

Fingerhut grew into one of the largest catalog retailers in the country with nearly $2 billion in annual sales. By the late 1990s, Fingerhut also had become an aggressive developer of Web retail sites.

Federated, owner of department store chains Bloomingdale's and Macy's, bought Fingerhut in March 1999 for $1.7 billion in hopes of jump-starting its own direct-to-customer sales business. But the business soured as electronic commerce opportunities faded and bad-debt problems grew among Fingerhut's customers.

In 2000, Fingerhut became a $150 million drag on Federated's profits. For the first three quarters of the current fiscal year ending in November, Fingerhut's revenue was $810 million, down from $1.26 billion a year earlier.

Cincinnati-based Federated is one of the nation's largest department store retailers, with annual sales from continuing operations of more than $15.5 billion. The company operates more than 460 stores in 34 states, Guam and Puerto Rico, under the names of Macy's, Bloomingdale's, The Bon Marche, Burdines, Goldsmith's, Lazarus and Rich's.