Talks have broken down between the City of Falls Church and Fairfax Water over a possible merger that might have ended a long conflict over supplying water to thousands of Northern Virginia customers.

A complex legal battle – which has already cost Falls Church alone approximately $1 million in legal fees — is now likely to resume in federal court, Fairfax Water officials said late Tuesday on the agency’s Web site.

Falls Church officials said the talks ended after three meetings in July when both sides failed to agreed on the amount of money the city should receive for transferring its assets to the larger county-controlled utility.

“It was worthwhile discussing the matter with Fairfax Water. However, we could not justify selling the system below what it is objectively worth,” Ira Kaylin, a city councilman and member of the City’s Public Utility Commission, said in a written statement.

Officials from Fairfax Water were not immediately available to comment.

Fairfax County’s water war intensified last year after the County Board of Supervisors assumed sweeping new powers to decide how water is delivered to county residents and at what cost.

The board’s amended county ordinance, which took effect July 1, gives the county oversight over water rates for all of its residents, including those who receive water from municipal systems operated by Falls Church, the City of Fairfax or the towns of Herndon and Vienna.

The supervisors said they acted after years of complaints from county residents who said their bills for Falls Church water were substantially higher than those of neighbors who receive service from the county-controlled utility.

The ordinance also set aside areas in the county that would be served exclusively by Fairfax Water, an independent entity whose board is appointed by the Board of Supervisors.

Falls Church officials have fought back, saying the county is bent on creating a monopoly whose spoils could include millions of dollars in utility fees for hooking up new development in Tysons Corner and Merrifield. Falls Church, Vienna and the City of Fairfax also have taken legal action challenging Fairfax County’s right to set rates for a service supplied by municipal utilities.

On the eve of a scheduled June 9 hearing in federal court, however, all parties to the litigation agreed to stand down for 90 days.

The broadening conflict has largely centered on Falls Church’s treatment of approximately 31,000 customers who live in Fairfax County but receive water service from the City of Falls Church. In the past, those customers were billed in excess of the cost of providing service and the excess revenues were transferred to the city’s general fund. From 1981 to 2008, those surplus revenues amounted to more than $58 million. In January 2010, however, a Fairfax County Circuit Court judge ruled that the Falls Church’s practice was, in effect, an unconstitutional tax on county citizens and ordered its halt.