Johnson & Johnson yesterday threatened to abandon its plan to acquire the Guidant Corporation, a troubled heart device maker, setting the stage for a financial and legal confrontation between the companies over the $25.4 billion deal.

The development is a stunning reversal for a deal that was applauded when it was announced in December as both a handsome payoff for Guidant shareholders and a way for Johnson & Johnson to enter the fast-growing market for implanted heart devices.

But along the way, Guidant, the nation's second-largest maker of heart devices, found itself ensnared by safety issues and product recalls that appeared to spin out of control.

Guidant disclosed in late May, for example, that one of its defibrillators had repeatedly failed because of an electrical flaw. That led to regulatory scrutiny, a string of product recalls, and most recently, a Department of Justice investigation.

In a statement yesterday, Johnson & Johnson, which is based in New Brunswick, N.J., said it believed that the recalls and federal investigations had materially affected Guidant's "short-term results and long-term outlook."

Guidant, based in Indianapolis, responded that any effect from the recalls would be short term, adding that Johnson & Johnson was legally obligated to complete the deal by tomorrow, as originally negotiated.

Guidant's legal problems also grew more complex yesterday as Eliot Spitzer, the New York attorney general, filed a lawsuit accusing the company of fraud in connection with sales of a defibrillator model that short-circuited in some cases. The lawsuit is seeking to force Guidant to disclose device-malfunction data and disgorge profits from sales of the defibrillator.

The deal's breakdown could present a challenge to Johnson & Johnson's strategy of growth by acquisition. [Page C1.]

Both Guidant and Johnson & Johnson did not rule out continuing talks, but with the original deal valued at $76 a share, any new agreement would depend on the two sides seeing eye to eye on a lower price. People involved in those talks described the latest moves by the companies as a high-stakes game of "chicken," with neither particularly interested in walking away just yet.

But these people suggested that a gap remained between the price Johnson & Johnson was now willing to pay and the price Guidant was willing to accept. These people said Johnson & Johnson was hoping to pay no more than in the low to mid-$60's, while Guidant was seeking a price in the low $70's or high $60's.

While some analysts said that Johnson & Johnson appeared to have the negotiating edge, other analysts said Guidant executives might choose to sue Johnson & Johnson because they believe that the stand-alone value is close to $60 a share. Yesterday, Guidant closed at $60.40 a share, down 4.3 percent, or $2.70, a share.

"They are playing chicken, and right now it appears that J.& J. has the upper hand," said Joanne K. Wuensch, an analyst with Harris Nesbitt.

The centerpiece of any future legal fight between the companies will revolve around a single but complex issue - whether Guidant's product recalls and related events have had a materially negative impact on its future sales and profits. And not surprisingly, both companies yesterday staked out their positions.

In its statement, Johnson & Johnson said it believed that developments had clouded Guidant's prospects. For its part, Guidant characterized those effects as "near term."

Courts have found that a significant negative impact must extend beyond the near term to qualify as grounds for terminating a contract. In 2001, a Delaware court ruled that Tyson Foods was not justified in terminating its merger deal with IBP, a beef processor, after Tyson contended that undisclosed financial problems at an IBP unit rendered the deal invalid.

"We believe that the fundamentals of our business are strong and our markets and products have attractive prospects for growth," Ronald W. Dollens, Guidant's chief executive, said in a statement.

Spokesmen for both companies declined to comment beyond their public statements or make executives available for interviews.

Johnson & Johnson issued its statement after the Federal Trade Commission yesterday gave it conditional approval to acquire Guidant.

Johnson & Johnson announced its plan to purchase Guidant in mid-December, with the $25.4 billion deal representing the company's biggest acquisition by far. The move represented a decision by Johnson & Johnson to move into the market for implantable defibrillators and pacemakers, a field that is rapidly growing because of an aging population.

Defibrillators send out an electrical charge to disrupt a potentially fatal heart rhythm; a pacemaker controls a heart that is beating too fast or too slowly.

Until recently, the deal was on track with both sides anticipating that it would close in September or October. But in late May, Guidant executives disclosed that they had not told doctors for three years that one defibrillator had an electrical flaw that had caused it to short-circuit and fail in about two dozen cases.

Guidant's disclosure came as The New York Times published an article about the problems with the device, which is known as the Prizm 2 DR, including its possible role in the death of a college student this year.

All manufacturers of heart devices recall products or have product failures. But Guidant quickly found itself at the center of a broader debate over how and when device problems should be disclosed. And company executives, rather than seeking to put the issue behind them quickly, appeared to fumble.

"In retrospect, they clearly underestimated the physicians and regulatory intolerance for severe events no matter how rare they are," said Bruce Nudell, an industry analyst with Sanford C. Bernstein & Company. "That was their fundamental mistake."

By June, the Food and Drug Administration was investigating Guidant's handling of safety issues and the company has since recalled tens of thousands of defibrillators and pacemakers, including its top-selling advanced pacemakers. Those products have been cleared by the F.D.A. for sale again, but the company is trying to regain market share. Recently, more bad news came in the form of a Justice Department inquiry.

Also in June, Johnson & Johnson began reviewing its options to renegotiate or end the deal under the terms of the agreement, people close to the company said. By the end of summer, Johnson & Johnson's board also became worried about continuing to pursue the takeover at the current price, these people said. Such concerns were based both on a review of Guidant's diminished current earnings as well as statistical models used to project future earnings.

At about the same time, Johnson & Johnson's outside lawyers at Cravath, Swaine & Moore advised the company that a legal showing could be made that a "material adverse change" had occurred, offering Johnson & Johnson a defense if Guidant sued the company for breach of contract, these people said.

In late September, William C. Weldon, chief executive of Johnson & Johnson, met privately with James M. Cornelius, the nonexecutive chairman of Guidant, and suggested that they renegotiate the transaction at a much lower price, according to people briefed on the meeting.

Mr. Cornelius said that Guidant might be willing to accept a slight cut, but at the meeting's end, the two executives differed over Guidant's value by at least 10 percent, those people said.

More recently, Guidant has rebuffed other overtures to renegotiate the deal at a lower price, the people briefed on the meeting said. The company's legal adviser, Skadden, Arps, Slate, Meagher & Flom, also told Guidant that it would have a strong court case against Johnson & Johnson if the deal collapsed, those people said.

Mr. Spitzer's lawsuit, filed yesterday in New York State Supreme Court in Manhattan, accuses Guidant of fraud in connection with its failure to alert doctors about the electrical flaw in the Prizm 2 DR defibrillator.

In a statement, Mr. Spitzer said that doctors needed safety information about implanted devices to determine which model was most appropriate for a patient. After fixing the device in 2002, Guidant continued to sell older models out of its inventory

"We would not permit this type of conduct in connection with the sale of cars or washing machines," said Mr. Spitzer, who last year sued drug companies to force them to disclose more clinical trial data. "It is simply unconscionable that it occurred with a critical medical device."

Late yesterday, a Guidant spokesman, Steven Tragash, said company policy was not to comment on litigation. But Guidant has said repeatedly that it has done nothing wrong.

In a recent filing with the F.D.A., Guidant also said that it planned to release more detailed data to doctors, but the company has declined to say when it will begin disclosing that data.