By Uday Sampath Kumar, Svea Herbst-Bayliss and RachnaManojkumar Dhanrajani

(Reuters) -U.S. department store chain Kohl's Corp on Friday called off its sale to Franchise Group after months of negotiations, citing sinking markets and difficult financing conditions.

Kohl's shares, already down 28% since January, tumbled nearly 15% in pre-market trading on news of the collapsed talks and the retailer's shrinking sales.

"Given the environment and market volatility, the board determined that it simply was not prudent to continue pursuing a deal," Peter Boneparth, Kohl's board chairman, said in a statement.

Kohl's, which operates more than 1,100 stores in the United States, last month announced that it had entered exclusive talks with Franchise Group after being offered $60 a share.

Franchise Group, owner of brands such as Vitamin Shoppe and Buddy's Home Furnishings, cut its offer on June 27 to $53.

The two sides "faced significant obstacles reaching a fully executable agreement", Kohl's said on Friday.

A Franchise Group representative did not respond to a request for comment.

Kohl's is also contending with tough market conditions as shoppers tighten their belts in the face of high inflation. The company said it now expects second-quarter sales to be down by a high single-digit percentage, compared with previous expectations of low single-digit decline.

Activist investors had pushed Kohl's to sell itself for months and the company began receiving bids in January at about $65 a share but said those undervalued the business. The company won a proxy contest against Macellum Advisors in May amid concerns that changes at board level could harm sales talks.

Since then, market conditions have worsened dramatically, with fears of rising interest rates, inflation and the Ukraine war prompting bidders to drop out or reduce their offers.

A number of major corporate deals have been shelved this year as a downturn in equity markets pummels company valuations while a spike in interest rates makes deal financing costlier and harder to access.

Walgreens Boots Alliance this week scrapped its plan to sell its UK pharmacy chain Boots, saying no third party was able to make an adequate offer owing to turmoil in global financial markets.

Kohl's in May joined other retailers in cutting its full-year profit forecast, with Chief Executive Michelle Gass saying demand at the company's department stores had weakened considerably because of inflation.

Franchise Group had said that Gass and other top executives would keep their jobs after a sale, suggesting to many investors that a deal was imminent.

(Reporting by Svea Herbst-Bayliss in Boston, Rachna Dhanrajani and Uday Sampath in BengaluruAdditional reporting by Akash SriramEditing by Rashmi Aich, Anil D'Silva and David Goodman)