Pixar, the computer animation pioneer founded by Apple Computer's Steve Jobs, said it would look for another studio partner to distribute its films starting in 2006, when its current deal with Disney expires.
The move was an unexpected blow to Disney, which reaped a financial bonanza and critical acclaim from the partnership and has struggled with its own strategy for animation.
Disney shares dropped 4 percent in after-hours trade.
The five movies that Pixar and Disney have released since 1995 have earned more than $2.5 billion at the global box office and accounted for a large share of Disney Studios' operating profit in recent years.
"After 10 months of trying to strike a deal with Disney, we're moving on," said Jobs, Pixar's chief executive. "We've had a great run together--one of the most successful in Hollywood history--and it's a shame that Disney won't be participating in Pixar's future successes."
Pixar had complained that the terms of the distribution deal were tilted too heavily in Disney's favor. Under the deal, Pixar was responsible for content, while Disney handled distribution and marketing.
In exchange, Pixar has split profits with Disney and pays the studio a distribution fee of between 10 percent to 15 percent of revenue.
Based on its blockbuster success, Pixar has argued that it should keep the profit itself and cut the fees its studio partner charges.
Many observers had expected Pixar and Disney, headed by Chief Executive Michael Eisner, to keep talking at least until the middle of this year and to eventually reach a deal since both had gained so much from their partnership.
"It makes it look like Eisner did something wrong again, but we shouldn't jump to conclusions. This could be a negotiating tactic by Pixar as well," said Patrick McKeigue, an analyst at Independence Investment, which holds Disney shares.
Disney was not immediately available for comment. Its stock fell quickly in after-hours trade to $23.54 from $24.45 at the close on the New York Stock Exchange.
The existing deal between Disney and Pixar includes two more films in production--"The Incredibles," set for release in November and "Cars," due out in 2005.
Disney will retain the rights to produce sequels to films such as "Toy Story," Pixar said in a statement.