(Corrects to add sourcing to headline)

Shares of Sun Microsystems Inc dropped on Monday after a source with knowledge of the matter told Reuters that IBM's talks to acquire its smaller rival broke down.

Sun Microsystems' Frankfurt-listed shares were down 23.9 percent at 4.74 euros by 4:16 a.m. EDT, while IBM's stock there was down 0.4 percent at 75.50 euros.

The source had told Reuters on Sunday the talks had collapsed after Sun rejected IBM's $7 billion offer.

The buyout was seen as a means of survival for the Silicon Valley company, which has been losing market share. A deal would also have helped IBM compete more effectively against rivals such as Hewlett-Packard Co.

An IBM spokesman had declined to comment, while Sun officials did not return calls.

Sources told Reuters in March that IBM was in exclusive talks to buy Sun and had proceeded to the due diligence stage. One source had said on Saturday that IBM lowered its offer price for Sun to $9.50 a share from $9.55 a share and that a deal may be announced this week.

Sun shares had risen to $8.49 on Friday, from $4.97 on March 17, a day before talks between the two technology companies were first reported. The Wall Street Journal had previously said IBM's original bid was $10 to $11 a share.

(Reporting by Maria Sheahan and Eva Kuehnen; Editing by Jon Loades-Carter)