A dispute which has shaken the internet gaming sector is heading for the courts in the British Virgin Islands after Empire Online on Monday said it would take legal action against PartyGaming.

Empire’s promise to “institute and vigorously pursue legal proceedings as soon as possible” came as takeover talks between the two companies collapsed.

Empire refused to entertain a 60p a share offer from PartyGaming, which would have valued the online marketing group at about £176m. It said the proposal had come after a “protracted due diligence process and continued delays in the timetable”.

The offer came two months after talks had ended between Empire and Sportingbet, another online betting group, on a deal which would have valued Empire at almost £800m.

Empire sends punters to online poker sites, such as those operated by PartyGaming, and shares the revenues they generate.

But the group was angered by a recent decision by PartyGaming to move gamblers who play online poker via PartyPoker.com – its own site – to a new technology platform. The move, in effect, left Empire punters stranded on an inferior operating platform and sparked a 30 per cent fall in the company’s shares.

Empire’s operations are based in Cyprus, although the company is incorporated in the British Virgin Islands. The group declined to comment on Monday on what form its legal action would take. Like PartyGaming, most of its income is generated in the US.

But in Empire’s listing particulars it refers to what would happen in the event of a breach of its contract with PartyGaming, saying: “Should the agreement with [PartyGaming] be breached . . . the company would have to sue such parties in the courts of the British Virgin Islands and to enforce any resulting judgement in Gibraltar.” PartyGaming is based in Gibraltar.

Empire first appointed lawyers last month when PartyGaming moved its players to the new platform. Legal action was suspended during the takeover talks but Empire said on Monday that the lawyers had been reactivated.

A person close to Empire said the threatened legal action was “entirely unconnected” with the breakdown of takeover talks.

PartyGaming said it was “highly confident of a successful outcome” in any legal action. A spokesman added that Empire was “clutching at straws”.

PartyGaming shares rose 1p to 99p while Empire shares closed up 5½p at 69p, a rise of more than eight per cent.

Noam Lanir, Empire’s chief executive, said: “We intend to remain leaders in the online gaming industry and will employ all our efforts to build and grow value for our shareholders.”