* Deal stumbles on control, price - sources
* Carlyle, Avista could re-enter talks if terms changed-sources
* Forest, Watson also help talks over Rottapharm deal-sources
By Sophie Sassard and Simon Meads
March 15 (Reuters) - Generics drug maker Mylan has pulled out of talks to buy a stake in Italian pharmaceuticals firm Rottapharm, two people familiar with the situation said, posing another setback to the arduous sales process that has been dragging on since the middle of last year.
The Rovati family had been looking to find an investor among rival pharma groups such as Mylan, Forest Laboratories and Watson Pharmaceuticals, after it failed to sell a minority stake to private equity houses.
But the sources said the selling family has not been able to agree to give up control of the company and was not prepared to compromise enough on price either.
As a result Mylan, based in Canonsburg, Pennsylvania, and the world's third largest generic drugs maker, is no longer in talks with Rottapharm's owner, two of the people said.
"If you want to keep control you need to compromise on price," one said. "If you want a high price, you need to give away some control."
Rottapharm founder Luigi Rovati put a stake of up to 50 percent in the group on the market last year, looking for a deal that would value the business at 2 billion euros ($2.6 billion).
Rovati first looked to sell part of the equity to Italian fund Clessidra in order to keep control of the company in Italian hands, and sell about 40 percent to an international buyouts group, the people said.
But it could not agree on those conditions with private equity firms including Carlyle Group and Avista and the talks stalled at the end of January.
The company has since had talks with other U.S. generic and branded drugs groups Watson Pharmaceuticals and Forest Laboratories, several people close to the process said.
One of the sources, who is familiar with Watson, said the group was unlikely to buy Rottapharm because their existing European presence means they would extra only few synergies.
And Forest -- which makes the antidepressant Lexapro -- is having problems of its own. It is expected to see its revenue drop by about one-fourth, after its flagship drug loses patent protection early next year.
The company is also under pressure from billionaire activist investor Carl Icahn who built a holding of over 9 percent in the company in an attempt to change its boss and bring in new board members.
Established in 1961, Rottapharm makes treatments for conditions including osteoarthritis as well as personal care products such as baby wipes.
Rottapharm, Mylan, Watson, and Forest either declined to comment or officials were not immediately available for comment.