CHICAGO -- Northwest Airlines executives on Monday broke off their negotiations with Minnesota officials for a possible $740 million bond-financed loan to finance the airline's expansion of operations in the state.

The state and the Metropolitan Airports Commission had been considering jointly financing the loan to Northwest. Under legislation approved in May by the Minnesota General Assembly, the state could have issued up to $350 million of general obligation and revenue bonds to finance two new airline maintenance facilities in the state, while the airports commission -- owner and operator of Minneapolis/St. Paul International Airport -- could have issued up to $390 million of GO and revenue bonds for a direct loan to Northwest.

Both issuers were in the due diligence process on Northwest's ability to repay the loans when the airline terminated negotiations. Final approval for issuing the bonds had not yet been given.

Christy DeJoy, a Northwest spokeswoman, said yesterday the airline pulled out of negotiations after the airports commission said it would only finance a $270 million lo1n, not the $390 million originally proposed by Northwest.

"The deal is off," Ms. DeJoy said. "We are now looking at other locations and other proposals."

She added Northwest had received financing offers from 40 other states before selecting Minnesota earlier this year.

Lynn Richardson, deputy executive director of the airports commission, said commission negotiators reduced their offer to Northwest in order not to jeopardize the commission's future ability to issue bonds for improvements at Minneapolis/St. Paul International Airport.

A study completed last week by accounting firm KPMG Peat Marwick assessed the commission's capital needs through the year 2000 and showed coverage on the commission's outstanding debt would drop below 1.25 times if the full $390 million of bonds were issued for Northwest. That was considered unacceptable by both commission staff and Chairman Hugh Schilling because it could hamper the ability to issue bonds using existing revenue sources, Mr. Richardson said.

He explained that the commission's $154 million of outstanding GO bonds currently carry two-times coverage derived solely from existing resources, such as airport land fees, rentals, and concession payments. The commission has the authority to levy an unlimited property tax in the seven-county metropolitan region, but it has not done so since 1969 and has no intention of doing so in the future, he said.

The Commission's GO debt is rated triple-A by both Moody's Investors Service and Standard & Poor's Corp.

The study showed that the airport will have $320 millin of capital needs in the next nine years, including the extension and major reconstruction of a runway, two new taxiways, and road and terminal improvements.

Although Ms. DeJoy said there are no plans for more negotiations between the airline and Minnesota officials, Gov. Arne Carlson hopes to persuade Northwest to come back to the table, according to Greg Frank, the governor's spokesman.

"We are extremely disappointed and surprised by Northwest's action," Mr. Frank said. "We hope to resume negotiations and remain open to a counter-proposal and discussions with the airline."

He declined to say whether the state would be willing to increase its share of the financing to make up for the reduction in the airport commission's offer.

Although final approval for issuing the bonds had not yet been authorized, both the state and the commission had picked teams of underwriters for the potential issues.

The state had selected Merrill Lynch & Co. as sole underwriter for $100 million of revenue bonds and a syndicate of Minnesota firms led by Piper, Jaffray & Hopwood Inc. for $47.6 million of revenue bonds. The remainder of the state's anticipated $350 million of bonds would have been GO debt sold competitively. Industry analysts said it would have marked the first time a stated had given its GO pledge to fund expansion of a major airline.

Before lowering its offer to $270 million, the airports commission had selected a local consortium led by Dain Bosworth Inc. to underwrite $270 million of GO bonds and Morgan Stanley & Co. as lead manager on $120 million of revenue bonds.

Gov. Carlson has been a firm supporter of the Northwest deal because of its potential economic benefits, Mr. Frank said. The state estimated that the new airplane maintenance facility to be located in Duluth and the engine repair facility to be built in Hibbing would create up to 2,000 jobs paying more than $40,000 a year.

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