UPDATE: China Mobile is now said to have denied Southern Daily’s report that talks with Apple have stalled. See here.

Instant analysis from The Mac Observer‘s Apple Finance Board:

Pretty much as expected, everyone is playing hardball, but China Mobile just blinked by having to issue a denial that it had terminated discussions, thereby looking like the weaker hand. They’ll be furious at having to disclose their interest in this manner – it undermines their bargaining position and strengthens Apple’s with the other carriers like Unicom. –Tommo_UK

– – –

Less than three weeks after the first reports that Apple (AAPL) was in talks with China Mobile — the world’s largest cell phone operator with 350 million subscribers — to carry the iPhone in China, negotiations have broken down, according to a report today in China’s
Southern Daily
newspaper.

This follows earlier reports that talks with China Unicom, the country’s second-largest carrier, had also failed. The sticking point in both cases: the revenue-sharing model that Apple insisted on — and got — in the U.S. and European market.

It’s impossible to say from the brief report today whether this door is firmly closed or could be re-opened. Henry Blodget has argued persuasively in
Silicon Alley Insider
that a China iPhone deal is inevitable. The Chinese market is so big that even if Apple got only a 1% slice of the pie, no revenue sharing and fire sale prices, it could see revenues of $600 million a year. A 5% market share at today’s iPhone prices could bring in $6 billion a year, even without revenue sharing. (link)

That there is demand for the iPhone among Chinese mobile aficionados is clear.
Wired
early this month reported on the lively trade in black market iPhones, known in China as the “Ai Feng” (“Crazy Love”). The devices are carried back into the country where they were originally manufactured by mules from Hong Kong and sell for as little as $474.

But Apple may need China more than China Mobile needs it. Earlier this week, Chinese wire services reported that rather than relying on the big Chinese distributors to sell the iPhone, Apple plans to open its own stores in China in 2008.