Steven Spielberg’s hopes of creating a new independent film company have been dealt a serious blow after the collapse of talks on a distribution deal with Universal Studios.

Negotiations between the two sides have been progressing for several weeks but when Mr Spielberg’s representatives asked for more money to plug a funding gap, NBC Universal, which owns the studio, ended the talks.

The collapse of the distribution deal – vital to the success of Mr Spielberg’s newly independent DreamWorks venture - follows the acclaimed director’s failure to raise $500m of debt. He has also been unable to secure a new pay-TV deal for DreamWorks with HBO, the Time Warner-owned cable channel.

Mr Spielberg needs the funds to relaunch DreamWorks, which is being bank-rolled by Reliance Big Entertainment, an Indian group. He recently negotiated the exit of DreamWorks out of Viacom’s Paramount Pictures studio with the aim of going alone, backed by the Reliance money.

But with the Reliance funding dependent on additional debt finance the project has effectively stalled. Universal on Friday said it had ended the negotiations “after DreamWorks demanded material changes to previously agreed terms”.

“It is clear that DreamWorks’ needs and Universal’s business interests are no longer in alignment,” it added. DreamWorks declined to comment.

Mr Spielberg had originally hoped to start his company with $1.2bn, with half of the money in Reliance equity and the rest in debt.

But the credit crisis has forced the director to scale back his original plans. He had been banking on a new pay-TV commitment but HBO is already well stocked with movies while Showtime, a rival cable channel owned by CBS, has scaled back its investment in Hollywood output deals.

Without a pay-TV deal, the company had sought additional investment from Universal. But that represented a step too far for NBC Universal, led by chief executive Jeff Zucker, which could not justify additional spending on top of a distribution arrangement.

Mr Spielberg has now switched his attention to Walt Disney, which could offer the distribution infrastructure his new project so desperately needs - although it is was unclear on Friday whether a deal with the studio was imminent.

The new film company’s launch comes at a difficult time for the industry. Credit markets are frozen while DVDs, Hollywood’s most important revenue stream, are in steep decline across the industry, with sales of new titles falling more than 20 per cent in the final three months of 2008.

News Corp and Time Warner this week blamed weaknesses in the DVD market for steep first quarter losses. Walt Disney also pointed to the decline of the industry when it reported a 32 per cent fall in profits.

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