Central to the dispute was the hit the banks would take in funding the deal, given the deteriorated lending conditions.

They had agreed to provide $22.1 billion in financing for the deal for fees of $400 million, but according to the original suit filed by Bain and THL, the banks feared they would lose $2.7 billion after the market worsened.

Bain and THL argued the banks tried to renegotiate the financing from long term to a short-term package and to change the terms so it would be unworkable in order to kill the deal.

The banks have argued the two sides were in talks when the buyers sued, which constrained further discussions.

A new deal, which would value Clear Channel at about $18 billion and leverage the company less, will have to go through another shareholder vote, the second source said. The original deal gave investors the option of co-investing in the company, known as "stub equity," and that will remain, the source said.

The original stub equity offer gave investors an opportunity to own 30 percent of the outstanding share capital after the restructuring.

TRIAL STARTS

A trial, which had been set to begin on Monday in New York State Court, was delayed until Tuesday and adjourned until the afternoon. Trial testimony then began with John Connaughton, Bain’s managing director, undergoing questioning.

Connaughton, before a courtroom packed with arbitrage traders, explained how he would look at 100 transactions a year, sign off on five to 10 and complete one to three.

Asked if he ever had a situation where once he had a commitment letter from the banks involved, financing had failed to come through, he replied, "In my experience of 19 years (working for Bain) that has never happened." It had also never happened in the deals for the 300 companies Bain had bought over the last 25 years, he added.

Some arbitrage traders in the courtroom put down their Blackberry e-mail devices as Connaughton, in response to Judge Helen Freedman’s questions, explained the complicated financing arrangements - delayed drawdown term loans, revolvers and accordions - that Bain had negotiated with the banks to ensure there would be liquidity to pay for Clear Channel.

"You cannot afford any kind of liquidity crisis," he said.

Freedman adjourned the trial just before 10 p.m. British time, reminding everyone to be back in court at 2:30 p.m. British time on Wednesday for Connaughton to resume his testimony.

A settlement would be the latest twist in the battle for Clear Channel since it announced in October 2006 that it had hired Goldman Sachs Group to help it evaluate strategic alternatives. Bain and THL beat out a rival consortium made up of Providence Equity Partners, Blackstone Group and Kohlberg Kravis Roberts and Co to buy Clear Channel for $37.60 a share.

The winning bid ran into trouble when a small number of big shareholders said it undervalued the company. The buyout firms then offered $39, and later $39.20. On Tuesday, Clear Channel shares closed up 4.4 percent at $34.30.

(Additional reporting by Megan Davies; editing by Andre Grenon and Braden Reddall)