Exchange giant CME Group Inc. discussed a merger with Deutsche Boerse AG in late 2007, but the two companies couldn’t agree on a price, according to people familiar with the matter.

The aborted talks show how hungry the Chicago company was to combine the biggest derivatives-trading operations in the U.S. and Europe. Even though the discussions fell apart, CME still has ambitions for world-wide dominance in derivatives.

Rumors are swirling that CME might try to break up the German company’s $10 billion acquisition of NYSE Euronext Inc.. While CME has played down the speculation, there are signs that Deutsche Boerse and NYSE Euronext executives are taking the potential threat of a hostile bid seriously, despite the imposing hurdles that such bids unusually encounter.

Negotiations before the deal was announced Tuesday included what to do if CME decided to make a bid for Deutsche Boerse or NYSE Euronext, according to a person familiar with the matter. The agreement also includes an unusually large breakup fee of $339 million that each company would have to pay the other if it walks away from the deal.

Analysts expect that this week’s drama over the fate of the deal to last for months as the two companies navigate political and regulatory hurdles. The agreement also ignited a flurry of matchmaking as other exchanges look at their own potential deals.

Frankfurt Challenge

Even if CME, which has a stock-market value of about $20 billion and owns the Chicago Mercantile Exchange and New York Mercantile Exchange, still is interested in Deutsche Boerse, some analysts and shareholders say it would be hard to nab the Frankfurt company. The gap between the companies’ market values is relatively small, and the political sensitivity in Germany about combining CME and Deutsche Boerse likely would be high.

Depending on the size of the premium paid to Deutsche Boerse shareholders, they probably would own less than half of the combined company. If the Deutsche Boerse-NYSE Euronext deal goes through as planned, the new company will be 60 percent-owned by Deutsche Boerse shareholders.

Still, a CME counterbid could make it harder for the NYSE Euronext-Deutsche Boerse deal to get the 75 percent shareholder approval needed from Deutsche Boerse shareholders, analysts said.

Investors in the German company, including many large institutional shareholders in the U.S., likely would give serious consideration to any CME offer, partly because of the company’s hefty market value. In addition, CME and Deutsche Boerse would be more heavily concentrated in futures than the lower-margin business of trading stocks.

If CME doesn’t want to buy Deutsche Boerse, it has strong reasons to try to slow or even derail the German company’s takeover of NYSE Euronext.

The combined company isn’t expected to lure away many of CME’s largest derivatives customers, but its new status as the world’s largest exchange operator could succeed in giving it a leg up in the lucrative business of clearing derivatives trades between banks in the vast, loosely regulated over-the-counter market.

Deutsche Boerse and NYSE Euronext expect their deal, the culmination of several years of on-again, off-again, on-again talks between chief executives Reto Francioni and Duncan Niederauer, to be completed by year end.

The two companies declined to comment Friday.

A spokesman for CME referred to a comment Tuesday by the company’s chairman, Terry Duffy, who said dismantling NYSE Euronext to get at the businesses CME wants most is “unrealistic.” In general, CME likes the futures businesses at NYSE Euronext and Deutsche Boerse, but isn’t as interested in their stock-trading and stock-listing operations.

In a separate statement Tuesday, CME said it remains “committed to creating shareholder value by executing our strategy to pursue organic growth opportunities in our core derivatives business, expand globally, and extend our capabilities into OTC markets and index services.”

Housing Impact

The 2007 discussions between CME and Deutsche Boerse came shortly before the convulsions in the housing market that eventually sank Bear Stearns Cos. and exploded into the financial crisis.

In 2006, Deutsche Boerse lost a battle to buy Euronext NV, which owned a rival derivatives exchange. In April 2007, Euronext completed a deal to sell itself to NYSE. Three months later, the Chicago Mercantile Exchange closed its merger with the Chicago Board of Trade, creating CME Group.

Soon, though, CME was weighing another potential whopper.

In September 2007, with Deutsche Boerse shares hovering around 80 euros a share, CME held discussions with Deutsche Boerse and some of its largest shareholders, including hedge funds Atticus Capital and the Children’s Investment Fund, about buying the Frankfurt exchange, according to people familiar with the matter.

Deutsche Boerse officials wanted 150 euros a share, but CME officials offered 120 euros a share and the talks floundered, one of these people said.

In January 2008, CME announced it was in talks with the New York Mercantile Exchange. It agreed to buy the U.S. energy and metals market operator for $8 billion.