Private equity firm Blackstone Group lost its $602 million bid to buy power producer Dynegy Inc. after failing to win shareholder support in the face of opposition from the two largest shareholders.

Dynegy said it planned to end the deal Tuesday and would look for other buyers, including the two shareholders — billionaire Carl Icahn and hedge fund Seneca Capital. Icahn has said he may bid for Dynegy if the Blackstone bid failed.

“Because we believe stockholders will not approve the transaction with Blackstone, the board will initiate an open strategic alternatives process to maximize stockholder value,” Dynegy Chief Executive Bruce Williamson said in a statement.

Blackstone reiterated in a statement Tuesday that its $5-a-share bid was its best and final offer, and wished Dynegy the best as it looks for a new buyer. The private equity firm is set to receive a $16.3 million break-up fee if Dynegy reaches a new deal at $4.50 a share or higher within 18 months.

Dynegy shares fell 3.7 percent, to $4.95, in early afternoon trading, dipping below the Blackstone bid after the announcement. Blackstone was down 2 percent, at $12.98.

Dynegy has been weighed down by a heavy debt load of more than $4 billion. A buyer would have to deal with the company’s debt, meaning any sale would be significantly more costly than the straight equity value.

Seneca and Icahn had fiercely opposed the Blackstone proposal because they thought it was too low, even after the private equity firm raised its bid 11 percent a week ago to try to muster support for the deal.

Pritchard Capital Partners analyst Charles Fishman said he believes that more value can be squeezed out of Dynegy than the Blackstone bid would have delivered. He said he believes the company’s break apart value is around $9 a share.

“Certainly it’s a lousy time to be selling those plants, but if you’re just patient, some of these plants are very, very good plants,” Fishman said. “But I think in another year or two, power prices recover and we see a recovery in natural gas prices. At that point I think you can get to what the Senecas and the Icahns think the value is.”

Dynegy, which once sought to challenge Enron Corp. in the power trading business and even sought to buy the disgraced energy company shortly before its demise, has focused in the last several years on operating its power plants in the Midwest, Northeast and West.

Dynegy sells power to the wholesale markets and operates more than 12,000 megawatts of gas- and coal-fired power plants.

The company is very sensitive to natural gas prices, which are correlated with wholesale electricity prices, and has suffered as oversupply has driven down the value of the fuel. It has argued that “the risks of continuing to operate as a stand-alone public company significantly outweigh the potential upside of doing so,” forecasting $1.6 billion of negative cash flow between 2011 and 2015.

But Seneca has put forward a much rosier view of Dynegy’s prospects, saying that power prices are improving and that the company is worth more than $6 a share.

Dynegy said a special committee of its independent board members, chaired by lead independent director Patricia Hammick, will oversee what it calls its strategic alternatives process.

The company has said it had put itself up for sale two years before reaching the Blackstone deal and had run a “go-shop” process where competing bids could be entered afterward. No bidder emerged during those processes.

Dynegy said it would engage with Seneca Capital about appointing an independent candidate to its board, which currently has six members, five of whom are independent.

Seneca has nominated two candidates to Dynegy’s board and proposed the removal of two current directors, including Williamson.

Dynegy also adopted a shareholders rights plan.

Blackstone’s bid had hung in the balance since Wednesday, when Dynegy delayed counting the shareholder vote. The shareholder meeting is still due to restart Tuesday afternoon, Dynegy said.

Blackstone’s bid was structured in an unusual way. It included a $1.36 billion deal by Blackstone to sell four of Dynegy’s natural gas-fired power plants to NRG Energy Inc. That deal was contingent on Blackstone completing the Dynegy bid.

NRG will look to lower the price of its bid for the plants before agreeing to any new deal for those assets, CEO David Crane has said.

Goldman, Sachs & Co. and Greenhill & Co. LLC will be financial advisers for the open strategic alternatives process. Sullivan & Cromwell LLP is legal counsel.