Two weeks ago, Britain's WH Smith expressed an interest in acquiring the unit, which includes Warner Books and venerable publishing house Little, Brown.

The British firm planned to merge it into Hodder Headline, its existing publishing house, to create a transatlantic book giant.

But WH Smith has now pulled out after preliminary talks, without providing a specific explanation.

The move leaves AOL without a potential book purchaser, at a time when it urgently needs ready cash to paper over cracks in its balance sheet.

Once one of the world's most admired firms, AOL lost $100bn in 2002 - the biggest loss in corporate history.

Partners walk away

Various firms have tentatively sniffed around AOL's book division, but so far without any firm interest.

Broadcasting giant Viacom - owner of publisher Simon & Schuster - was tipped as a potential bidder, but has said it is no longer interested in investing more in books at present.

Rupert Murdoch's News Corporation - the firm behind Harper Collins - has also walked away.

The firm industry insiders have long suspected would buy Time Warner Books, New York publisher Random House - owned by German media firm Bertelsmann - has so far remained aloof.