SEOUL (Reuters) - Nexon Co 3659.T founder Jungju Kim has abandoned plans to sell a controlling stake in its parent NXC, two sources with direct knowledge of the matter said, scuppering a potentially $16 billion deal that would have been the gaming sector's biggest.

FILE PHOTO: Logos of online gaming firm Nexon are seen at its main office building in Seoul December 14, 2011. REUTERS/Kim Hong-Ji/File Photo

Kim had been looking to sell the 98.6% stake he and his wife hold in NXC, which in turn owns 48% of Tokyo-listed Nexon.

Since it emerged in January, the sales plan has been dogged by funding challenges, the intricacies of Nexon's relationship with its biggest customer, China's Tencent Holdings 0700.HK, and protectionist South Korean sentiments.

“I am not picking a preferred bidder in light of market conditions and others,” its billionaire founder said in an email sent to bidders via adviser Morgan Stanley, South Korean newspaper Joongang Ilbo reported.

The paper reported that Tencent or other tech giants had not joined the bidding, which contributed to the collapse of the deal.

Tencent’s participation was seen as key to any deal, since it owns the exclusive China licence for Dungeon Fighter (DNF), Nexon’s most successful game.

Sources said this year that whoever won the bidding for NXC would have to ensure Tencent was cooperative.

Bids from South Korean gaming company Kakao 035720.KS and private equity firm MBK Partners fell short of the seller's expectations, while the funding capability of Netmarble 251270.KS, another South Korean gaming firm, was in doubt, the paper added.

Nexon, Netmarble and MBK declined to comment. Reuters was not able to reach Kim. Tencent has previously declined to comment on any interest in the NXC stake. Kakao did not immediately comment on the news, when contacted by Reuters.

Nexon shares rose 3% on Tuesday in a flat wider Tokyo market .N225.

Netmarble, whose shares have been weighed down by the prospect of a Nexon deal, announced a share buyback worth 200 billion won ($169.53 million) on Tuesday, sending its shares up by as much as 8.4%.

Taking into account the market value of Nexon and a takeover premium of 15% - around the standard for other gaming deals, according to Dealogic data - the deal was seen this year as being worth about $16 billion, ranking it among South Korea’s biggest.

Formal bidding for the stake was delayed from mid-May, sources had told Reuters.

“It seems that few bidders have financial capability to buy Nexon with a high price tag,” Lee Mina, an analyst at KTB Securities, said.

She said a dearth of hit games from Nexon since DNF, which was launched in 2005, was one of the “risks” to bidders.

Morgan Stanley, which sources said was one of the advisers hired by Kim to explore a sale of his NXC stake, was not immediately available for comment. Deutsche Bank, another adviser, according to the sources, declined to comment on Monday.