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UPDATE 3-Xerox abandons planned deal with Fujifilm in victory for Icahn and Deason

Deason@

* Xerox now expected to go up for sale in auction

* Fujifilm disputes termination of deal, may seek legal action

* Apollo has also expressed interest in acquiring Xerox - sources (Recasts and adds Fujifilm comment)

NEW YORK/TOKYO, May 14 (Reuters) - Xerox Corp has scrapped a planned $6.1 billion deal with Fujifilm Holdings Corp in a settlement with activist investors Carl Icahn and Darwin Deason that also hands control of the U.S. photocopier giant to new management.

The victory for the billionaire investors puts the Japanese company further on the backfoot in any new negotiations with Xerox, although it is by no means out of contention as Xerox is now expected to go up for sale in an auction at a higher price.

Fujifilm was quick to take a combative stance, saying in a statement it disputes Xerox's unilateral decision to terminate the transaction and would look at all options including legal action seeking damages.

The two companies agreed in January to a complex deal that would merge Xerox into their Asia joint venture Fuji Xerox. The deal prompted Icahn and Deason, who own 15 percent of Xerox, to launch a proxy fight.

The activist investors have also said they are unhappy with the current structure of the joint venture, and settlement creates uncertainty concerning potential changes to a business that accounts for nearly half of Fujifilm's revenue.

The settlement will see Chief Executive Officer Jeff Jacobson - the main architect of the deal with Fujifilm - as well as five other directors step down. John Visentin is expected to take the helm.

It is Xerox's second settlement with the activist investors in just two weeks. The first settlement agreement was allowed to expire as Xerox came to believe it had flexibility to renegotiate a deal with Fujifilm and also took into account a stock dive that followed the agreement.

"We are extremely pleased that Xerox finally terminated the ill-advised scheme to cede control of the company to Fujifilm," Icahn said in a statement.

Xerox said its new board would meet immediately and "begin a process to evaluate all strategic alternatives to maximize shareholder value."

Buyout firm Apollo Global Management LLC have considered a bid for Xerox, sources have said.

Visentin had previously been hired by Icahn to assist in fighting Xerox. He had also been a candidate under consideration by the old board to replace Jacobson as recently as last year, according to court documents.

Xerox, which earlier sought better terms from Fujifilm, said it was ending the deal with the Japanese company partly because Fujifilm had failed to provide audited financial information for Fuji Xerox by an April 15 deadline.

Xerox also said there were "material deviations" between audited Fuji Xerox financial statements and unaudited statements provided previously.

As part of the settlement, Xerox and Icahn agreed to withdraw their board candidates from an upcoming shareholder meeting, and said the meeting would be postponed.

(Reporting by Alwyn Scott and Makiko Yamazaki; Additional reporting by Greg Roumeliotis in New York, Ritsuko Ando in Tokyo and Imail Shakil in Bangalore; Editing by Peter Cooney and Edwina Gibbs)