The move is a setback for Philips' exit from the consumer electronics business to focus on more the profitable home appliances and healthcare areas.

Philips' shares fell on the news and were down 2 percent at 25.495 euros at 09:43 gmt.

Philips has struggled for years to compete with lower-cost Asian manufacturers, including Samsung Electronics and LG Electronics.

It had already hived off its ailing television business by setting up a joint venture with Hong Kong-based TPV in 2012. The deal with Funai Electric was intended to complete the exit from home entertainment.

Philips, which announced the sale for 150 million euros back in January, said it will take legal action against Funai to recover damages.

"Funai has refused to take the necessary steps to enable completion of the transaction and the transfer of the business," Philips said in a statement.

"As a result, Philips will start arbitration proceedings in the International Court of Arbitration and will terminate the agreement signed in January."

The business, renamed WOOX Innovations, is headquartered in Hong Kong and has annual sales of 1.2 billion euros.

"Year to date, our carved-out audio, video, multimedia, accessories business shows a positive net income and has leading market positions in areas like home cinema sound, docking speakers and headphones," Philips chief executive Frans van Houten said in the statement.

(Agencies)

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