* US tyre maker says to continue pursuing legal steps
* Says Indian tyre maker breached merger agreement
* Apollo not reachable for comment
(Updates with quotes, details, background)
MUMBAI, Dec 30 (Reuters) - U.S.-based Cooper Tire & Rubber Co said on Monday it was terminating a proposed $2.5 billion sale to Apollo Tyres Ltd, marking the end of an agreement plagued by obstacles from the start.
Cooper did not say if Apollo would pay a $112.5 million break-up fee, but said the Indian tyre maker had breached a merger agreement between the two companies and added it would pursue legal steps to protect the company and its shareholders.
That would continue a legal stand-off between two sides, whose relationship descended into acrimony soon after Apollo in June agreed to buy Cooper for $35 a share, hoping to transform itself into the world's seventh-largest tyre maker and cut its dependence on domestic sales.
Yet the high debt levels required to buy Cooper spooked Apollo investors and the Indian group sought a price cut of as much as $9 a share, citing Cooper's U.S. labour trouble and disruptions at a Chinese joint venture.
Meanwhile, the U.S. tyre maker sought unsuccessfully to legally force the Indian company to complete the deal under the agreed terms.
Apollo was not immediately reachable for comment. Cooper is due to hold a briefing at 1400 GMT.
"It is time to move our business forward," said Roy Armes, Cooper Tire's chief executive, in the statement.
"While the strategic rationale for a business combination with Apollo is compelling, it is clear that the merger agreement both companies signed on June 12 will not be consummated by Apollo and we have been notified that financing for the transaction is no longer available," Armes added.
The collapse of the deal may be welcomed by Apollo investors who had worried about the debt involved in acquiring a company nearly three times its stock market value at that time.
"It is a positive for Apollo," said Nishant Vyas at ICICI Securities in Mumbai.
"Now, the question remains whether there can be a penalty or some kind of financial liability on Apollo because of any legal recourse that Cooper wants to take. The probability of that might be lower because whatever court judgment has come so far has come in favour of Apollo."
Expectations the deal would unravel rose after a court in Delaware in November ruled the Indian tyre maker had not breached its obligations, delivering a setback to Cooper's attempt to compel Apollo to close the deal.
An appeal by Cooper was dismissed by the Delaware Supreme Court this month. The case returned to the lower court, which asked for an update on Jan. 10 on the status of the deal.
The two sides have been at loggerheads for months, with Cooper accusing Apollo of suffering a case of buyer's remorse.
The Indian tyre maker has blamed Cooper for its difficulties in securing financing for the deal, after initially lining up funding from Deutsche Bank, Goldman Sachs, Morgan Stanley and Standard Chartered.
At the heart of the dispute has been Apollo's failure to reach contract agreements with Cooper's United Steelworkers union as mandated by a U.S. arbitrator in September.
At the same time, Chengshan Group, Cooper's partner in China, has opposed any merger with Apollo, filing a lawsuit against the U.S. tyremaker to dissolve their joint venture.
Apollo has said these two developments were not expected at the time of the deal, but Cooper maintains the issues are a result of the merger and says Apollo was aware of the risks.
Cooper CEO Armes said addressing the joint venture in China and restoring normal operations was the company's "top priority in the near term," while noting its focus would also be on growing its broader business.
"While Cooper believes Apollo has breached the merger agreement, and we will continue to pursue the legal steps necessary to protect the interests of our company and our stockholders, our focus will be squarely on our business and moving it forward," he said.
The collapse leaves Apollo to focus on a slowing home market, which provides two-thirds of its revenue. The tyre maker in November said domestic sales had fallen 7 percent in July through September.
Indian companies are looking overseas as the domestic economy grows at its slowest in a decade, but have struggled to convince investors after debt-fueled takeovers like Tata Steel's $13 billion purchase of Anglo-Dutch Corus in 2007 fared poorly.
Apollo shares hit a record 104 rupees on Dec. 30 and are up over 10 percent since it first announced the deal in June. Cooper closed at $22.96 on Friday, well below the offer price.
(Additional reporting by Mridhula Raghavan in Bangalore; Writing by Rafael Nam and Aradhana Aravindan; Editing by Matt Driskill and David Hmolmes)