A dispute over marketing rights held by mining group Xstrata's biggest shareholder is threatening a possible takeover by Brazil's Vale worth around $90 billion, a source close to the situation said.

Shares in Anglo-Swiss Xstrata tumbled 4.8 percent to 39.38 pounds by 1200 GMT on Thursday, making it the second-biggest percentage loser in the FTSE 100 index. The UK mining index fell 1.0 percent.

Xstrata has gained a quarter since Vale said on January 21 it was in talks about a possible acquisition of Xstrata.

The two sides have hit an impasse over demands by Swiss commodities trader Glencore, which holds a 35 percent stake in Xstrata, for an expansion of marketing rights in the combined firm, said the source, who declined to be named.

Glencore has a string of lucrative long-term contracts to sell a large portion of Xstrata's mining output and wanted further scope if Vale bought the firm, he added.

They're a long way apart. If that's not resolved, there really isn't anything to talk about, the source said.

Negotiations have veered away from price, which previously had been a sticking point. The two sides are more or less happy with a price around 45 pounds a share, he added.

A European analyst who declined to be named said it was likely the two sides would still hammer out a deal.

The combination really makes sense because you are talking about very complementary businesses, he said.

ROCKY TALKS

A marriage of the two companies would diversify Vale from dependence on iron ore by boosting its presence in copper and nickel.

The negotiations have been rocky and around two weeks ago sources close to the situation said they were on the verge of collapsing because the two sides could not agree on a price.

An upturn in the outlook for metals prices in recent weeks and a strong settlement in contract prices for iron ore helped bring the two sides closer together in that area, analysts say.

Vale, the world's biggest iron ore producer, secured agreements with Asian and European steelmakers earlier this month to raise its iron ore prices by 65 percent.

Since iron ore accounts for 40 percent of Vale's cash flow, the settlement gave confidence to the firm to boost its informal offer, which had been pegged at around 40-42 pounds, analysts said. They estimated that the increase in ore prices would result in an additional $10 billion of annual revenue for Vale.

Even if a marketing framework is agreed, however, the combination could face anti-trust concerns, the European analyst added.

Besides Vale's dominant role in iron ore, the combined business would become the world's top ranking nickel producer, surpassing Russia's Norilsk Nickel.

Vale has secured loans of an estimated $50 billion from a pool of about eight banks -- including Santander, HSBC, BNP Paribas, Lehman Brothers, Credit Suisse, Citigroup, Calyon and Royal Bank of Scotland, a source close to the financing has told Reuters LPC..

Vale is due to post results after the market close on Thursday, but the source said the firm is not expected to comment on the takeover talks.

Xstrata is due to post results on Monday.

United kingdom