US technology market Nasdaq has set a one-month deadline in negotiations to take over the London Stock Exchange, according to documents obtained by The Guardian newspaper.

After this date Nasdaq would switch its allegiance to Germany's Deutsche B�rse in the race to create a pan-European stock market, the newspaper said.

Nasdaq wants to create an "agile and flexible" London exchange with links to the London International Financial Futures Exchange (Liffe), making up the "third hub" of a global 24 hour stock exchange, according to reports.

In a separate development, Deutsche B�rse is reported to be seeking 10 million euros (�6.03m) compensation from the LSE for breaking off merger talks earlier this year.

'Talking to everyone'

An LSE spokesman said: "The Deutsche B�rse has written a letter to us. The general message is that they are looking for cash.

"We will contest this claim vigorously."

The London exchange is refusing to discuss its alleged negotiations with Nasdaq.

"Everybody is talking to everybody. But we are not going to discuss individuals or particular exchanges at all," said a spokeswoman when asked about The Guardian's report.

A Nasdaq spokesman also declined to comment on the report but said the exchange was talking to all the major parties in Europe, including the LSE.

Penalty clause

Deutsche B�rse is believed to be seeking to exercise a penalty clause in the planned iX merger deal which collapsed in September.

Frankfurt's Boersen-Zeitung newspaper said the planned deal, which would have created Europe's biggest stock market, had contained a clause which could be exercised if one party unilaterally broke off the merger process.

Boersen-Zeitung said it was highly unlikely the LSE would agree to pay the penalty - equivalent to about 12.5% of its pre-tax profit last year - meaning the German bourse would have to pursue its claim through the courts.

Souring future relations

Deutsche B�rse officials declined to comment. But supervisory board member Klaus Patig, a director of Commerzbank, said he was not aware of the letter.

It was not discussed at a supervisory board meeting on Monday.

Financial market sources said Deutsche B�rse's claim was unwise and was likely to kill off any co-operation between the two exchanges.

Others accused the Deutsche B�rse of pursuing a "scorched earth" policy which could put off other potential partners.

In a separate move, the German exchange confirmed plans on Monday for an initial public offering early next year to raise funds for future investments and create acquisition currency.

Going it alone

The LSE has continually insisted that it is capable of going it alone since it pulled out of talks with Deutsche B�rse to concentrate fully on defending itself from a hostile takeover bid launched by Sweden's OM Gruppen, a bid which subsequently failed.

The London exchange has drawn up a plan to for an independent expansion into Europe and elsewhere.

But if its chairman, Don Cruickshank, fails to persuade shareholders of the strength of the proposals, some sort of deal could be inevitable.

Euronext, the alliance of the Paris, Brussels and Amsterdam bourses is also believed to be seeking a merger with the LSE.