AOL signed the deal two years ago with Legend, China's biggest computer maker, but its internet service was never formally launched.

Announcing the change of heart, Legend argued that there was too much competition in the Chinese internet market to justify such a large investment.

But the US firm is also facing hard times, and is cutting costs and rethinking its strategy after last year posting the world's biggest-ever corporate loss.

Crowding in

The venture is not yet dead.

AOL and Legend are considering the addition of other partners, possibly one or both of China's two big fixed-line telephone companies to the venture.

A trial of the service, known in Chinese as "Flying Dragon", launched last summer and has been successfully completed.

But Legend argued that the dynamics of the Chinese market have changed over the past couple of years.

The country's top telephone companies, China Netcom and China Telecom, have both launched internet services, despite previous evidence that they would not.

Tough market to crack

The deal attracted a great deal of attention in 2001, because foreign participation in Chinese media and online ventures is highly restricted.

Fearful of the cultural effects of the internet, the Chinese authorities screen much online content.

Analysts reckon that the market was already more or less impenetrable even before the main telephone firms joined in.

China has a disproportionately large number of internet service providers, and growth in e-commerce has been patchy.

AOL has a mixed record of investment in overseas internet access.

While it has performed strongly around Europe, it has only two ongoing units in Asia - in the westernised markets of Japan and Australia.