Pixar Animation Studios said Thursday that it has broken off its talks with the Walt Disney Co. and will not extend its distribution agreement with the studio once it expires in 2005 after the completion of two more films.

The move could have a dramatic impact on Disney's standing as the industry's leading distributor of animated films. It is sure to set off a fierce competition among its rival studios, all eager to distribute Pixar's lucrative product. And it provides Roy E. Disney, who recently resigned as vice chairman of the Disney board of directors, with further ammunition in his campaign against Disney chairman and CEO Michael Eisner.

Shares of Disney fell 45 cents, or 1.8%, to close at $24 Friday on the New York Stock Exchange, while shares of Pixar rose $2.19, or 3.4%, to $66.39 on the Nasdaq Stock Market.

On Friday, the bond rating agency Fitch Ratings reinforced its negative outlook on Disney's bonds because of the uncertainty surrounding the company's ability to compete with Pixar in two years.

In announcing an end to the negotiations, Pixar chairman Steve Jobs said: "After 10 months of trying to strike a deal with Disney, we're moving on. We've had a great run together -- one of the most successful in Hollywood history -- and it's a shame that Disney won't be participating in Pixar's future successes."

In a statement, Eisner wished Jobs and John Lassiter, Pixar's creative head, "much success in the future," adding, "Although we would have enjoyed continuing our successful collaboration under mutually acceptable terms, Pixar understandably has chosen to go its own way to grow as an independent company."

Jobs, whose Emeryville, Calif.-based company has turned out movies whose creativity and financial success has far overshadowed that of Disney's homegrown product in recent years, had been attempting to strike a tough deal.

Since its first movie, 1995's "Toy Story," Pixar has continually broken new ground in the field of computer animation, creating a string of ever-bigger hits, culminating in last year's "Finding Nemo," the year's top grosser, which was released through Disney's Buena Vista Distribution, bringing in $340 million domestically.

Under its current agreement, last negotiated in 1997, Disney and Pixar had agreed to co-finance five films, sharing equally in the profits and licensing fees. But because Disney also took a distribution fee of 12.5%, it effectively took home a bigger share of the boxoffice returns from each film than did Pixar.

During the course of the negotiations, Jobs had pushed for Disney to give up its 50% ownership position in Pixar films, which would have left the studio earning a straight distribution fee -- possibly one as low as 10%.

In looking to extend their agreement, Jobs also had been seeking to renegotiate the terms of the final two films it covers: "The Incredibles," to be released in November, and "Cars," scheduled for 2005.

Speaking to analysts in October, Disney president and chief operating officer Robert Iger confirmed that "the relationship we have with them ... on the next two pictures is on the table on both sides. There is value to be gained on their side and value to be potentially given up on ours."

About two months ago, Disney offered a set of proposals that, according to sources at the studio, would have seen the Burbank studio voluntarily giving up hundreds of millions of dollars on the next two films. But when Pixar recently presented Disney with a counteroffer, Disney found it unacceptable, arguing that it would have represented a huge transfer of value from Disney shareholders to Pixar shareholders.

Although the two sides were seemingly at loggerheads, Disney had one bit of leverage in its arsenal: Under the existing agreement, it has the right to produce sequels, including direct-to-video and TV series, to the movies it has co-produced with Pixar. It had held off developing those properties, out of deference to Jobs' wishes, even as it watched its competitors develop sequels like DreamWorks' upcoming "Shrek 2."

Still, Disney, in the eyes of a number of studio insiders, faced a lose-lose situation. One insider called the talks' breakdown "disappointing but not entirely unexpected. Either you negotiate a lousy deal for your studio with Pixar, or Pixar walks. So either way you lose."

Nevertheless, Disney sources claimed to be surprised when Jobs ended the talks so abruptly.

In response to the talks' ending, Disney chief financial officer Thomas Staggs said that Disney rejected Pixar's final offer because it would have cost Disney hundreds of millions of dollars that it is entitled to under the existing agreement without offering enough compensation on further collaborations to justify changing the existing deal.

Jobs, who visited with the heads of several other studios to assess their own distribution and merchandising operations before entering into the talks with Disney, said that once Pixar completes "Incredibles" and "Cars" under the current Disney deal, it intends to retain full ownership of its future productions and will soon begin discussions with other studios about distributing its future films.

Warner Bros. Pictures, 20th Century Fox, Sony Pictures and Universal Pictures are all expected to be among Pixar's suitors.

Each is gearing up to argue its strengths: Warners has one of the largest imprints in international distribution and home video; Fox, having worked with George Lucas' Lucasfilm, whose movies it distributes for a fee, has experience servicing an independent, Northern California company; Sony, in addition to theatrical distribution, has ready access to video games and digital media; and Universal, thanks to its merger with NBC, now can offer network and cable access in addition to its theme parks.

"We would welcome the opportunity to pursue discussions with Pixar and believe we would make an excellent choice," Fox spokeswoman Flo Grace said.

Said Warners spokeswoman Barbara Brogliatti: "We would love to be in business with Pixar. They're a great company."

Job's action also comes as Roy E. Disney, the nephew of the studio's founder, ratchets up his campaign to oust Eisner. Just this week, he called on board members to vote against Eisner, and three other board members allied with him (HR 1/28).

Disney and his colleague and fellow board resignee, Stanley Gold, issued a statement Thursday decrying the end of the Disney-Pixar pact.

"As significant shareholders of the Walt Disney Co., we are extremely dismayed but not surprised by the loss of Disney's Pixar relationship," the joint statement said. The two went on to praise Pixar's "five grand-slam home runs in five times at bat for Disney" and again took Eisner to task for what they called his "inability to manage and nurture crucial creative relationships like the one Disney had with Pixar."