(Reuters) - Oilfield services provider Halliburton Co (>> Halliburton Company) is seeking to replace the board of smaller peer Baker Hughes Inc (>> Baker Hughes Incorporated), as merger talks between the companies stalled.

Baker Hughes said late on Friday that it had rejected Halliburton's initial proposal, which was made more than a month ago, in a deal that would create $2 billion in synergies after divestitures.

"Baker Hughes is disappointed that Halliburton has chosen to seek to replace the entire Baker Hughes board rather than continue the private discussions between the parties," Chief Executive Martin Craighead said in a statement.

The companies have so far failed to agree on a price and other key issues such as how to address antitrust concerns, people familiar with the discussions said.

Baker Hughes also said that Halliburton refused to increase its first proposal after it had made a counter offer, in what is already a strained takeover courtship.

However, Baker Hughes could still return to the negotiating table, one of the people added.

Halliburton shares edged down 0.3 percent after ending 1.3 percent higher at $55.08. Baker Hughes fell 2.3 percent from its closing price of $59.89, also on the New York Stock Exchange.

A merged company would be worth $67 billion and have 140,000 employees. But it would be only half the size of industry leader Schlumberger (>> Schlumberger Limited.), which has a market capitalization of $125 billion.

If a deal were struck, the companies could well have to sell assets to convince regulators they would not hurt competition, said Seth Bloom, an attorney who is a former veteran of the U.S. Department of Justice's antitrust division.

One of the sources said up to $7.5 billion in divestitures was contemplated by the parties.

The last major deal in the energy industry, announced in August and worth some $70 billion, was pipeline giant Kinder Morgan Inc's (>> Kinder Morgan Inc) move to fold its various units into a single entity.

(Reporting by Mike Stone in New York and Narottam Medhora in Bangalore; Editing by Richard Chang and Ken Wills)

By Mike Stone