UPDATE 3-IBM, Sun Micro talks collapse over price -source

* Talks collapse over price

* IBM's offer was $9.40 or lower

* Unclear if talks will resume (Adds background on talks)

By Ritsuko Ando

NEW YORK, April 5 (Reuters) - IBM's (IBM.N) talks to acquire smaller computer and software rival Sun Microsystems Inc (JAVA.O) broke down on Sunday after Sun rejected IBM's $7 billion offer, a source with knowledge of the matter said.

The collapse of negotiations, if final, is likely to hurt Sun's shares as a buyout was seen as a means of survival for the once-storied 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 (HPQ.N).

The source, who was not authorized to speak publicly about the matter, said Sun was unhappy with International Business Machines Corp's offer of $9.40 per share or below, and that it was unclear if talks would resume.

The bid represented a premium of up to 89 percent on Sun's shares before deal talks were first reported last month.

"Sun is now sort of damaged goods," said Peter Falvey, a technology banker at Revolution Partners. "If IBM got under the covers and didn't like what they saw, then what does that mean for other potential buyers?"