Copper producer Phelps Dodge Corp. (PD) on Tuesday said it has agreed with takeover target Inco Ltd. to cancel their planned combination amid indications that Inco shareholders would reject the $17.4 billion deal.

Phelps Dodge said it has received a $125 million payment from the nickel miner as a result of the deal being terminated. Canada's Inco has agreed to pay another $350 million if the company changes hands on or before Sept. 7.

Phelps Dodge, Falconbridge Ltd. (FAL) and Inco Ltd. (N) had agreed to a three-way combination earlier this year. However, Anglo-Swiss mining concern Xstrata PLC won control of Falconbridge late last month while Brazil's Companhia Valo de Rio Dolce SA has offered to buy Inco for $17 billion, all in cash.

Phelps Dodge's cash-and-stock offer is currently valued at $17.4 billion but investors tend to favor cash offers because of the possible fluctuation in stock prices.

"The synergies available in a two-way combination with Inco were much smaller than those available in the three-way combination," said Phelps Dodge Chairman and Chief Executive J. Steven Whisler. "After CVRD made its all-cash, $86-per-share offer, we elected not to participate further."

In a separate statement, Inco Chairman and Chief Executive Scott Hand said, "It was very clear from the proxies we received that Inco shareholders were not going to support the Phelps Dodge transaction, so the two companies agreed that it was in our respective best interests to move on."

Inco said it remains open to negotiations with CRVD and noted it is no longer restricted from soliciting acquisition proposals.

Phelps Dodge canceled a special shareholder meeting scheduled for Sept. 25, while Inco canceled its shareholder meeting called for Sept. 7.

Phelps Dodge shares rose $2.85, or 3 percent, to $93.60 in premarket trading, while Inco shares fell 60 cents to $77.10.