Home Depot Inc agreed to cut the price in its supply division sale to buyout firms by $1.8 billion, sources said on Sunday, as a housing market drop and a credit crunch forced all sides to renegotiate.

As part of the new agreement, Bain Capital, Carlyle Group and Clayton, Dubilier & Rice will pay $8.5 billion for the division, two sources familiar with the matter told Reuters.

The move marks the first time a major private equity deal has been forced to lower its price since the leveraged buyout boom began roughly two years ago.

The deal is also a turning point for the private equity industry, as the banks and the buyers have endured a long and ugly renegotiation that is likely to have wide repercussions.

The buyout firms will kick in an extra $150 million each in equity into the deal and Home Depot will take on $1 billion of the unit's debt, one source said.

The Atlanta-based home improvement retailer will also take a roughly 10 percent equity stake in the division, another source said. The sources did not want to be identified ahead of an official announcement expected early on Monday.

Home Depot and the buyout firms declined to comment.

The reduced price comes as the credit market crunch has forced banks to reel in loose lending practices that came to define the private equity deal frenzy of the last two years.

A steep fall-off in the housing market also led to the price cut, as the supply division's worsening business prospects forced the two sides to come back to the bargaining table.

Private equity firms buy companies by borrowing most of the money. They typically hold onto companies for two to four years before selling them, typically hoping to make two to three times what they spent on the business.

From the beginning of the year until mid-August, private equity firms announced $712.92 billion worth of deals, more than double the year ago period, as frothy debt markets and a steady economy allowed heavy and cheap borrowing.

But the meltdown in the U.S. subprime mortgage market spurred a credit crunch across Wall Street, forcing banks to stop lending large sums to private equity buyers.

JPMorgan, Lehman Brothers and Merrill Lynch were the banks involved in financing the Home Depot Supply deal, with top executives at each bank involved in the last minute talks. The deal was so fragile that there was talk of the buyers simply walking away and paying a fee.

Increasing equity commitments from the private equity firms lower their return potential on the deal, and also shows the banks that the firms are willing to bite the bullet too.

As debt investors have stopped buying for the time being, the banks are forced to take the debt on themselves, raising the risk of losing money on the deal. Indeed, analysts say Home Depot Supply may go down as a watershed transaction that marks what could be the end of the two-year private equity mega-deal frenzy.

THE SUPPLY SIDE

The supply business was launched in 1997 and Home Depot boosted it by buying companies like water and sewer products supplier National Waterworks Holdings in 2005. Last year, Home Depot expanded the unit with the $3.2 billion buyout of Hughes Supply, the retailer's biggest acquisition to date.

Home Depot spent roughly $8 billion to purchase the businesses that are part of the unit. Home Depot Supply accounted for 13 percent of Home Depot's total sales of $90.8 billion in the 2006 fiscal year.

The retailer is looking to shed the supply unit to focus on shoring up its retail business and trying to win back market share. This month, Home Depot reported a 15 percent drop in second-quarter profit, while rival Lowe's reported a 9 percent profit increase.

It also cut the price for a tender offer for 250 million shares to a range of $37 to $42 a share, from $39 to $44 previously, citing market conditions.

Home Depot Chief Financial Officer Carol Tome also suggested on August 14 that should there be no supply sale, the size of the company's big buyback could be reduced to $12 billion.

The prospect of the supply sale faltering raised concern among some investors about the fate of the tender offer, which expires August 31.

(Additional reporting by Karen Jacobs in Atlanta)

Merrill Lynch Investment Citigroup Lehman brothers