Johnson & Johnson warned Wednesday it might pull out of a $25.4 billion deal to buy Guidant Corp. because of potential liability arising from the medical device maker's sweeping product recalls and a regulatory investigation. But Guidant officials said J&J was legally bound to go through with the deal.

"Recent product and communications issues have certainly had an impact on our business in the near term," Guidant chief executive Ronald W. Dollens said in a statement. "However, we believe that the fundamentals of our business are strong and our markets and products have attractive prospects for growth."

Meanwhile, analysts said J&J, which makes a wide variety of health care products, from baby lotion to drug-coated heart stents, might be turning its focus to Guidant's rival, St. Jude Medical Inc., in its quest to diversify.

St. Jude spokeswoman Angela Craig said the company does not comment on speculation.

Indianapolis-based Guidant shares sank $2.70, or 4.3 percent, to close at $60.40 on the New York Stock Exchange, where it had fallen to a 52-week low of $59.25 during the day. J&J shares fell 60 cents to finish at $61.30 on the NYSE.

St. Jude Medical stock rose $2.10, or 4.3 percent, to close at $50.44 after briefly reaching a new 52-week high of $50.70.

Wednesday's market speculation and corporate posturing came as the Federal Trade Commission gave conditional approval for the New Brunswick, N.J.-based J&J to acquire Guidant, which is based in Indianapolis.

J&J quickly issued a statement saying recent recalls of Guidant-made implantable devices and regulatory investigations have had a "material adverse effect" on Guidant and that it was not required to close the acquisition. J&J officials said negotiations to restructure the terms of the proposed buyout had not yielded a compromise.

"Johnson & Johnson cannot assure that the companies will resume those discussions or, if discussions do resume, whether they will be able to reach agreement on revised terms that would allow Johnson & Johnson to proceed with the transaction," the statement said.

Pulling out of the agreement could cost J&J $700 million, according to the merger agreement. But if J&J can prove the recalls have adversely affected Guidant, it won't have to pay the termination fee, said Randolf W. Katz, an attorney specializing in mergers and acquisitions with Bryan Cave LLP in Irvine, Calif.

Since June, Guidant has recalled or issued warnings about 88,000 heart defibrillators -- including its top seller, the Contak Renewal 3 -- and almost 200,000 pacemakers because of reported malfunctions.