* Broadcaster can't agree contract with favoured candidate
* Chairman Grade to leave before year end
* Shares down 2.2 percent
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By Kate Holton and Paul Sandle
LONDON, Sept 25 (Reuters) - Britain's biggest commercial free-to-air broadcaster ITV Plc was forced to restart its search for a chief executive after failing to agree terms with favoured candidate Tony Ball.
ITV, home to shows such as Coronation Street and X Factor, had offered Ball, former boss of pay-TV group BSkyB, the job over three weeks ago but the two sides failed to agree terms on an incentive package, a person familiar with the situation told Reuters on Friday.
The dispute, along with the announcement that Executive Chairman Michael Grade will stand down, leaves the broadcaster effectively rudderless during the worst advertising downturn for decades.
Shares in the group were down 2.2 percent at 45-1/2 pence by 1437 GMT, compared with a flat FTSE 100 Index. They hit a low of 44.14p, their lowest in about three weeks.
ITV in August reported a more than 60 percent fall in first-half underlying earnings and any new chief executive will need to establish new revenue streams and a fresh strategy.
The source said the move to end talks with Ball had been a unanimous decision from the ITV nominating committee. ITV said the two sides had also failed to agree on who would chair the company in future but said Grade would leave once a new non-executive chairman was found.
The new non-executive chairman will then lead the search for a new chief executive and will appoint any interim executive management, allowing Grade to leave the company after three years in charge.
LOST OPPORTUNITY
"The search process for a new chairman is well advanced and discussions are ongoing with a number of external candidates," ITV said in a statement.
Grade is expected to leave before the end of the year.
The breakdown of talks with Ball is a huge blow for ITV, after it said in April it was looking for a new chief executive to let Grade step back from the day-to-day running of the business.
"It's disappointing, it's a lost opportunity and clearly he was the best person for the job," analyst Paul Gooden at Royal Bank of Scotland said. "Were they right to say no? Potentially yes, but we don't know the details on the contract negotiations."
Executives likely to be linked to the vacant CEO post include ITV Chief Operating Officer John Cresswell and Peter Fincham, the company's director of television.
Simon Fox, chief executive of HMV Group Plc, previously held talks about the ITV chief executive post but chose to stay at the retailer.
A source familiar with the negotiations had told Reuters on Monday Ball and ITV had agreed a basic salary but were still in talks on an incentive scheme, under which Ball could receive about 20 million pounds over five years if he hit all his targets.
Ball was chief executive of BSkyB from 1999 to 2003 and was responsible for driving subscriber growth through the offer of leading sports and movies, taking it back to profit.
He left amid great fanfare and praise but analysts have since accused him of failing to properly invest in the business, compared with his successor James Murdoch, who invested in popular new products and new revenue streams. (Editing by Rosalba O'Brien and David Holmes)