(Reuters) -- Talks between Yahoo Inc and China's Alibaba over the U.S. internet giant's Asian assets have hit an impasse, throwing their plans for a $17 billion tax-free asset swap into question, according to sources briefed on the situation.

Collapse of the proposed deal -- referred to as a cash-rich split-off -- would mark the latest setback for an erstwhile Internet media giant now struggling to turn its business around and appease unhappy shareholders.

One person briefed on the situation described the deal as effectively dead in the water following unreasonable terms sought by Yahoo during negotiations in Hong Kong.

But Yahoo appeared to see things differently. The company had not been informed that the tax-free deal was officially off the table, and it remained committed to continuing negotiations, according to another source familiar with the matter.

Representatives from Yahoo and Alibaba Group declined to comment.

The sources said Yahoo and its Asian partners could still strike another, taxable deal, though that remained to be seen.

Shares of Yahoo were down 5.8 percent to $15.19 in afternoon trade.

The deal would have seen the exchange of Yahoo's slices of Alibaba and Yahoo Japan back to those companies, in return for unspecified assets.

Investors had hoped that Yahoo, after years of foot-dragging, would finally arrange for the sale of its Asian assets, considered among the most valuable parts of its portfolio.

AllThingsDigital, which initially reported the snag in the negotiations on Tuesday, cited one source as saying discussions completely halted after negotiators from Yahoo -- whose chairman, Roy Bostock, is due to step down and whose chief executive, Scott Thompson, is barely a month into the job -- changed tack on what they wanted from the deal. The report gave no details.

Analysts say Yahoo failed to take aggressive action in past years to reverse a decline in advertising revenue in the face of competition from Google Inc and Facebook, incensing shareholders who blamed the Yahoo board for waffling.

This month, Bostock announced he and three other directors would step down, following co-founder Jerry Yang out the door. Yang was excoriated for turning down a rich Microsoft Corp acquisition bid years before.

(Writing By Edwin Chan; Editing by John Wallace)