Toys"R"Us says it will pursue the project without Benchmark, but it faces stiff competition from online toy-sellers KB Toys, e-Toys and Amazon.com's new toy division.

Under the terms of the original deal announced in April, Benchmark was apparently to provide $10m (£6.25m) and Toys"R"Us $80m (£50m) of the start-up funding.

Benchmark said the deal had foundered because of issues to do with how the new Toys"R"Us.com would be run.

Toys"R"Us aims to be the biggest online toy retailer by the end of the year

Benchmark general partner Robert Kagle said: "We realised it was a business Toys"R"Us felt they needed to own and that was inconsistent with our return objectives."

A spokesman for Toys"R"Us rejected this account of the negotiations but declined to comment further.

The project got off to a rocky start when the founder and chairman of University Games, Bruce Moog, was originally put in charge, only for him to quit shortly afterwards quoting "business disagreements".

The chief executive of Hasbro's OddzOn novelty toys was then appointed to head the project.

Toys"R"Us said on Monday that its second-quarter revenues fell to $12m (£7.5m) from $14m a year earlier.

The figures included a $4m (£2.5m) special charge associated with setting up the online retail operation.