The NHS's troubled IT programme has been dealt a further blow after negotiations with a key supplier broke down.

An£896m, 10-year contract with Fujitsu Services to install new electronic records systems across south and south west England will be terminated, the company and Department of Health have confirmed.

The deal collapsed after months of negotiations.

A spokesman for Fujitsu told HSJ both sides had tried to make the deal work.

The company said it had withdrawn because it "did not feel there was a prospect of an acceptable conclusion".

The spokesman would not confirm reports that the breakdown was over government demands for increased flexibility.

Connecting for Health said the deal had broken down "despite best efforts by all parties".

"Work has started immediately on planning the necessary arrangements," said a spokeswoman.

Fujitsu had committed to "providing a smooth transition", she added.

This is the latest setback for the£12.7bn IT programme, which is already more than four years behind schedule.

BT, which runs the programme in London, has been tipped to take over the contract.

"If Connecting for Health were to ask BT to take on additional work, then we would consider it," said a spokesman.

Other contenders might include CSC, which is delivering the programme in the North, Midlands and East regions, and EDS, which works with trusts in the South West.

Fujitsu is the second IT firm to leave the project, after Accenture, which was responsible for delivering the system in the North and North West, quit key parts of the scheme in 2006.

Business experts said the IT scheme was a tough contract to take on. One told HSJ: "Something on this scale, creating electronic patient records, has never been done before, so there is no template to work from and that's an issue.

"It's not like building a private finance initiative hospital, which has been done."

See Michael White's column.