Enron Corp. swooned at the edge of one of the biggest corporate collapses in U.S. history on Wednesday as its rescue by rival Dynegy Inc. blew apart.

Dynegy accused Enron of breaching the representations it made when a takeover agreement was negotiated on Nov. 9, invoking an escape clause that let it pull out of the all-stock deal valued at $9.3 billion at the time.

Shares of Enron, recently ranked No. 7 on the Fortune 500 list of the biggest U.S. companies, had lost most of their value in the past three weeks, and all three major credit rating agencies had slashed their ratings on Enron's bonds to junk status by the time Dynegy made its announcement.

Enron's latest disaster marked another low in a stunning free-fall that began innocently enough with the announcement of a $638 million quarterly loss six weeks ago. Surprise disclosures, including the admission it overstated earnings by almost $600 million since 1997 and kept huge debts off its balance sheet, led investors to rapidly lose faith in a company valued at almost $80 billion a little more than a year ago.

On Wednesday, its market value was less than $500 million.

In response to Dynegy's announcements and credit rating downgrades, Enron said it will temporary suspend all payments other than those necessary to maintain its core operations.

Kenneth L. Lay, Enron's chairman and chief executive, said the company was evaluating and exploring other options to protect its core energy businesses.

The loss of Enron's investment-grade credit rating forces some $3.9 billion in debts to come due immediately, a major problem for a company that has spent most of the $5.5 billion it sought in recent weeks to stay afloat. Enron said in a recent regulatory filing that it was unlikely to "continue as a going concern" were its credit rating to be slashed to junk status.

It became increasingly clear, as Dynegy sought to renegotiate the deal, that Enron's tricky and often indecipherable accounting was becoming a sticking point, sources close to the negotiations said.

"While it is regrettable to see a leading industry player in difficulties, this does not reflect a failure of the merchant energy business," Dynegy Chairman and Chief Executive Officer Chuck Watson said in a statement.

Dynegy said it would exercise its option to buy Enron's Northern Natural Gas Pipeline with the $1.5 billion it and partner ChevronTexaco put into the deal.

Dynegy said it stopped trading with Enron as of Wednesday morning, pegging its exposure at $75 million.

A bad sign came earlier on Wednesday, as energy traders said operations had stopped at Enron's once highly lucrative online trading system, EnronOnline. The unit accounted for up to 90 percent of Enron's earnings, and was considered the jewel of the trading franchise that Dynegy coveted most in its planned $9.3 billion all-stock takeover.

Risk Management Failures

Enron, which touted itself as an agile risk manager, found its credit and debt had spiraled out of control as a series of partnerships designed to hide debt off of its balance sheet caused investors to lose faith in recent weeks.

The partnerships, which included top Enron executives and are the subject of a U.S. Securities and Exchange investigation, provided financing in exchange for guarantees that Enron's stock stay above certain levels and its credit remain investment-grade. But they came back onto the balance sheet with a vengeance, as Enron found it would have to meet massive debt obligations as its shares and credit fell.

Enron shares plunged $3.53, or 85 percent, to 61 cents on Wednesday, as the New York Stock Exchange twice halted trading of Enron shares before announcements affecting the company. It's stock has fallen more than 98 percent this year.

The stock peaked at $90.56 in August 2000, riding high on the cresting wave of the technology boom after Enron took its trading outfit online and promised to bring its business model into the broadband communications arena.

"They (Enron) entrapped the sophisticates," said Robert Stovall, senior strategist at Prudential Securities, referring to what was once an almost fawning admiration for Enron by institutional investors. "I think this is going to become a classic case."

Stovall, with nearly 50 years of Wall Street experience, said he could not recall any previous corporate unraveling that matches that of Enron.

"You would have to go to pre-SEC days for that," he said, referring to the creation of the SEC in the aftermath of the stock market crash of 1929.

The Final Cuts

Standard & Poor's, Moody's Investors Service and Fitch all cut their ratings on the fallen energy trading giant's debt to junk status. S&P said it had lost confidence in Enron's ability to complete the merger with Dynegy, and said bankruptcy was a "distinct possibility" if the merger fails.

Andre Meade, a Commerzbank analyst who has been consistently bearish on Enron and the deal, said its core business deteriorated at an increasing pace in recent weeks, and the ratings agencies could not find the liquidity they wanted inside Enron.

"The numbers were not enough to soothe them," said Meade, who downgraded Enron to "sell" from "hold" on Wednesday. "This company should have been downgraded to junk weeks ago. The ratings agencies had given them several weeks, and they just couldn't hold out anymore."

Dynegy on Nov. 9 said it would take over Enron in a deal valued at about $10.41 per Enron share. ChevronTexaco Corp., a major Dynegy shareholder, pledged to immediately pump $1.5 billion into Enron to bolster its withering finances.

Deal advisers J.P. Morgan Chase and Citigroup have already contributed $1 billion to the deal, and were expected to have to put up after Enron was rebuffed by private equity firms it had approached seeking more cash.

Representatives of Dynegy and Enron had haggled over new terms for the takeover late into Tuesday, including a buyout offer half the original price, sources close to the talks said.

Enron's crash began when it said it would take $1.01 billion in writedowns and charges against its third-quarter earnings for failed investments. It later admitted that it had to reduce stockholder equity by $1.2 billion to extract itself from partnerships in which now-ousted chief financial officer Andrew Fastow the managing partner.

Those deals, in which Fastow earned about $30 million in management fees, are the subject of an SEC investigation and the. Worse yet for Enron, it was required to restate its earnings going back four years, shaving off $600 million in the process.