Regulators halted closed-door negotiations about net neutrality rules with phone, cable and Internet companies on Thursday after reports of a side deal between two participants, Verizon Communications Inc and Google Inc, surfaced.

We have called off this round of stakeholder discussions, said Edward Lazarus, chief of staff for Federal Communications Commission Chairman Julius Genachowski.

The collapse means Genachowski may have to decide how to regulate Internet access without further input from the industry. His decision will likely be challenged in court.

It has been productive on several fronts, but has not generated a robust framework to preserve the openness and freedom of the Internet, Lazarus said of the meetings in a statement. All options remain on the table.

An analyst warned that the series of private meetings among industry stakeholders could implode due to the deal between Verizon and Google over a set of Internet traffic principles, called net neutrality.

Any outcome, any deal that doesn't preserve the freedom and openness of the Internet for consumers and entrepreneurs will be unacceptable, Genachowski told reporters.

His comments and the decision to halt the meetings were lauded by public interest groups.

We're relieved to see that the FCC now apparently finds dangerous side deals from companies like Verizon and Google to be distasteful and unproductive, Derek Turner, research director at the public interest group Free Press, said.

Under the deal, Verizon would not block or slow Internet traffic over land lines, but could do so to wireless devices, one source told Reuters on Wednesday.

A Verizon spokesman on Thursday denied that the deal represents a business arrangement between the two companies.

The agreement was reached while the private FCC meetings involving the two companies, AT&T Inc and other Internet companies to set rules for the industry were taking place.

According to several people who have been briefed on the FCC meetings, no consensus was imminent and it would have been unlikely for Congress to pass any such agreed-upon framework in a bill in this session, especially with the looming elections.

CLASSIFYING BROADBAND

The FCC voted in June to collect public comments on whether the agency should reclassify broadband regulation under existing phone rules -- typically considered a stricter regulatory regime.

Any compromise on net neutrality could have staved off reclassification, a move aimed at giving the FCC more power over broadband access after a stinging court loss.

Earlier this year, a U.S. appeals court ruled that the FCC lacked authority to stop cable television company Comcast Corp from blocking bandwidth-hogging applications.

The deal between Verizon and Google was not a complete surprise for the industry because the two companies have worked closely in the wireless device area.

Verizon Wireless, a venture between Verizon Communications and Vodafone Group Plc, depends heavily on phones based on Google's Android software for growth.

It is not known if the other stakeholders would find the deal an acceptable framework for their businesses but AT&T said it is not a party to the deal.

(Editing by Leslie Gevirtz and Gerald E. McCormick)