LONDON (Reuters) - British engineering company Smiths Group (>> Smiths Group plc) said it had terminated discussions over a sale of its medical division after it failed to agree terms with the bidder, which a source previously named as U.S. healthcare group CareFusion (>> CareFusion Corporation)

Shares in CareFusion slumped as much as 10 percent and were trading 8.8 percent down at $35.51 cents at 1617 GMT on Friday. Smiths' shares were down 5.5 percent at 1,324 pence.

Smiths said on May 31 that it was in early stage talks about selling the unit after a bid approach. The sources said at the time the division could be worth more than 2 billion pounds.

"Smiths Group announces that it has not proved possible to reach agreement with the potential counterparty on acceptable terms for a transaction," the company said in a statement.

Smiths Medical, which contributed 35 percent of the company's operating profit last year, supplies equipment to hospitals and emergency services. Most of its products are manufactured in the United States, Britain, Mexico and Italy.

B. Riley & Co analyst Gene Mannheimer said speculation over the deal had caused a "frenzy of buying" in CareFusion stock, which had risen by more than 10 percent in price since the end of May.

"Simply put, now that the discussions have been withdrawn, it's bad to CareFusion's fundamentals, which, quite frankly, are not very strong at this point," he said. "A deal would have been complementary to CareFusion's product line and certainly accretive."

($1 = 0.6596 British pounds)

(Editing by Paul Sandle and Elaine Hardcastle)

By Brenda Goh and Zeba Siddiqui

Stocks treated in this article : CareFusion Corporation, Smiths Group plc